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American Institute of Certified Public Accountants v. Internal Revenue Service

United States District Court, District of Columbia

August 3, 2016

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, Plaintiff,
v.
INTERNAL REVENUE SERVICE, et al., Defendants.

          MEMORANDUM OPINION

          JAMES E. BOASBERG United States District Judge

         Unlike the legal-services market, the tax-preparation ecosystem is a biodiverse habitat within which four species of tax-preparers compete for clients - certified public accountants (CPAs), attorneys, enrolled agents, and unenrolled tax preparers. The first three are subject to varying levels of licensing requirements and regulatory controls, while the fourth - some 600, 000 unenrolled preparers - have long remained in the regulatory shadows. In 2011, the IRS decided the time had come for unenrolled preparers to show their bona fides. It thus promulgated a rule that would have required all unenrolled preparers to, among other things, pass a qualifying exam and satisfy continuing-education requirements. Three unenrolled preparers displeased by these new requirements filed suit, and this Court along with the Court of Appeals agreed that the IRS had exceeded its statutory authority in creating the new rule.

         Undaunted, the IRS in July 2014 created the Annual Filing Season Program, a certification regime that contained many of the same components as the prior unlawful rule but made all participation voluntary. Notwithstanding its noncompulsory character, this program also had its detractors, who believed the IRS lacked authority to create it. This time, though, it was not the unenrolled preparers bringing suit, but rather the American Institute of Certified Public Accountants, a professional organization that represents accountants and accounting firms - some of which also employ unenrolled preparers. This Court granted the IRS’s motion to dismiss on standing grounds for lack of injury, but the D.C. Circuit reversed. In so doing, however, the Court of Appeals indicated that it was not determining whether AICPA had also demonstrated its entitlement to sue - i.e., whether it came within the zone of interests protected by the relevant statute. This prompted the IRS on remand to file a Motion for Judgment on the Pleadings with regards to that very issue. As the Court ultimately concludes that AICPA does not fall within the applicable zone of interests, it will grant Defendants’ Motion.

         I. Background

         A. Tax-Return-Preparer Market

         When someone wants help preparing his taxes - April is the cruelest month - he will usually look to one of “four groups: (1) certified public accountants (CPAs); (2) lawyers; (3) ‘enrolled agents’; and (4) unenrolled preparers.” Am. Inst. of Certified Pub. Accountants v. IRS (AICPA II), 804 F.3d 1193, 1194 (D.C. Cir. 2015). The first three are regulated by either the IRS or state adjuncts: “CPAs and attorneys are subject to state professional licensing regimes, and enrolled agents are licensed by the IRS and subject to various IRS requirements including taking continuing education courses and passing an exam.” Id. at 1194-95. All three are also bound by the strictures of IRS Circular 230, “which includes rules and disciplinary procedures for practice before the IRS.” Id. at 1194.

         The fourth group - unenrolled preparers - is simultaneously the least regulated and the most numerous, comprising around 60% of the tax-return-preparation market. Id. at 1198. Apart from being required to obtain and use a “Preparer Tax Identification Number, ” Treas. Reg. § 1.6109-2, they are not otherwise required to take classes, pass an exam, or demonstrate competency in preparing tax returns. See AICPA II, 804 F.3d at 1195.

         B. The 2011 Rule and Loving

         In 2011, the IRS decided it was time to take a closer look at unenrolled preparers. In June of that year, it promulgated a rule, see Registered Tax Return Preparer Rule, 76 Fed. Reg. 32, 286 (June 3, 2011), that would have required any unenrolled preparer to pass a qualifying examination, complete fifteen hours of continuing-education courses annually, and subject herself to Circular 230, a document that, as mentioned, provides details regarding what counts as sanctionable conduct and the procedural particulars of the IRS’s disciplinary regime. See id. at 32, 301, 32, 303, 32, 306; see also 31 C.F.R. §§ 10.20-.38.

         In crafting the rule, it relied on a 132-year-old section of the Internal Revenue Code, 31 U.S.C. § 330(a), which gives the Treasury Secretary, subject to certain conditions not relevant here, authority to

(1) regulate the practice of representatives of persons before the Department of the Treasury; and
(2) before admitting a representative to practice, require that the representative demonstrate-
(A) good character;
(B) good reputation;
(C) necessary qualifications to enable the representative to provide to persons valuable service; and
(D) competency to advise and assist persons in presenting their cases.

§ 330(a) (2012) (full text republished in Appendix to this Opinion).[1] The IRS homed in on its power in § 330(a)(1) to “regulate the practice of representatives of persons before the Department” as justifying its regulatory ambitions. See 76 Fed. Reg. at 32286.

         Three unenrolled preparers challenged the rule, arguing that its promulgation exceeded the IRS’s authority under that statutory provision. This Court agreed, granting summary judgment to the plaintiffs and enjoining enforcement of the rule. See Loving v. IRS (Loving I), 917 F.Supp.2d 67, 74 (D.D.C. 2013). On appeal, the D.C. Circuit affirmed, concluding that when a person acts as a tax-return preparer, she is not acting as a “representative” of her client as that term is used in § 330(a)(1). Loving v. IRS (Loving III), 742 F.3d 1013, 1017 (D.C. Cir. 2014). Reinforcing this reading, the phrases “practice . . . before the [IRS]” and “presenting their cases” in §§ 330(a)(1) and (2) make clear that Congress was intending to give the IRS the power to regulate representatives in “traditional adversarial proceedings” like audits, rather than non-adversarial activities like preparing and filing a tax return. Id. at 1017-18. Because “the process of filing a tax return” is essentially “one of self-assessment” and demands neither “arguments [n]or advocacy in support of the taxpayer’s position, ” the court concluded that “tax-return preparers do not practice before the IRS when they simply assist in the preparation of someone else’s tax return, ” and are thus not “representatives” who fall within the IRS’s regulatory orbit. Id. (citations and quotation marks omitted).

         One additional point is worth noting. Although this Court permanently enjoined the IRS from enforcing the rule upon entry of its summary-judgment order, see Loving I, 917 F.Supp.2d at 81, it subsequently narrowed the scope of that injunction when ruling on the IRS’s request for a stay pending appeal. See Loving v. IRS (Loving II), 920 F.Supp.2d 108, 109 (D.D.C. 2013).

         The Court denied the IRS’s request, but in so doing made clear that it was

not requiring the IRS to dismantle its entire scheme. It may choose to retain the testing centers and some staff, as it is possible that some preparers may wish to take the exam or continuing education even if not required to. Such voluntarily obtained credentials might distinguish them from other preparers.

Id. at 111. Perhaps taking this clarification to heart, the IRS decided to retain much of the rule’s infrastructure, but did so by relying on tax preparers’ willingness to voluntarily participate. It is this voluntary program that sits at the heart of the current suit.

         C. The 2014 Annual Filing Season Program

         In July 2014, the IRS released Revenue Procedure 2014-42, albeit without notice and comment, in which it created the Annual Filing Season Program. See Rev. Proc. 2014-42 (AFS Program), 2014-29 I.R.B. 192 (2014); see also Internal Revenue Manual 32.2.2.3.2 (Aug. 11, 2004) (defining “Revenue Procedure” as “an official statement of a procedure by the Service that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties, and regulations, or information that, although not necessarily affecting the rights and duties of the public, should be a matter of public knowledge”). The “new, voluntary [AFS] Program [is] designed to encourage tax return preparers who are not attorneys, certified public accountants (CPAs), or enrolled agents (EAs)” - i.e., who are unenrolled preparers - “to complete continuing education courses for the purpose of increasing their knowledge of the law relevant to federal tax returns.” Id. § 1 (emphasis added).

         The Program allows these unenrolled preparers to apply for a “Record of Completion, ” which the IRS will issue “[u]pon verification that the requirements in section 4 of this revenue procedure have been met.” Id. § 4. Those requirements include, inter alia, (a) obtaining a preparer-tax identification number, (b) taking an annual “federal tax filing season refresher course, ” (c) passing a comprehension test, (d) completing a minimum of fifteen hours of continuing education annually; and (e) consenting to be “subject to the duties and restrictions relating to practice before the IRS in [specified portions] of Circular 230.” Id.

         Quite unlike the 2011 rule, “no tax return preparer is required to participate.” Id. § 3. The IRS did, however, create several incentives to drum up interest. First are reputational benefits. The IRS designed the Program to allow successful participants to “‘stand out from the competition by giving them a recognizable [R]ecord of [C]ompletion that they can show to their clients.’” Compl., ¶ 7 (quoting Defendant IRS Commissioner John Koskinen). In addition, participants’ names also appear in the IRS’s online Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. See http://irs.treasury.gov/rpo/rpo.jsf (last visited August 3, 2016).

         The second major incentive is obtaining the ability to “practice” before the IRS in limited circumstances. Prior to the AFS Program, any unenrolled preparer could “engage in [such] limited practice by representing taxpayers before the IRS during an examination with respect to tax returns and claims for refund that the RTRP prepared and signed.” Rev. Proc. 2014-42, § 2. In other words, unenrolled preparers could assist clients during an audit, but only as to those tax returns that the preparer had herself prepared. Upon creation of the AFS Program, however, the IRS conditioned this “limited practice right” on successfully obtaining a Record of Completion, meaning that unenrolled preparers who declined to participate would no longer be able to engage in “limited practice” before the IRS. See id. § 6.

         D. Procedural History

         AICPA filed suit shortly after IRS announced the Program, seeking a declaration that it was unlawful and an order enjoining its implementation. See Compl. at 22-23. The IRS moved to dismiss for lack of standing, arguing that not a single one of Plaintiff’s members had suffered a constitutionally sufficient injury. See ECF No. 8 (Mot. to Dismiss) at 2. Plaintiff, in turn, countered with three theories of injury it thought sufficient to establish Article III standing. See ECF No. 10 (Opp. to Mot. to Dismiss) at 20-24. As will be explained in more detail below, see infra Section III.B.2, this Court concluded that none of the three theories passed muster and granted the IRS’s Motion. See Am. Inst. of Certified Pub. Accountants v. IRS (AICPA I), No. 14-1190, 2014 WL 5585334, at *5 (D.D.C. Oct. 27, 2014), rev’d sub nom. AICPA II, 804 F.3d 1193 (D.C. Cir. 2015).

         AICPA nevertheless found some success on appeal. In late 2015, the Court of Appeals concluded that it did have standing on at least one narrow basis: competitive injury. See AICPA II, 804 F.3d at 1197. On that point, the court concluded that [AICPA’s] members . . . will face intensified competition as a result of the [AFS Program]. Specifically, participating unenrolled preparers will gain a credential and a listing in the government directory.

[AICPA] alleges-and we must accept as true for purposes of assessing its standing-that this will “dilute[] the value of a CPA’s credential in the market for tax-return-preparer services” and permit unenrolled preparers to more effectively compete with and take business away from presumably higher-priced CPAs.

Id. (quoting AICPA’s Reply Br. at 12). It therefore reversed this Court’s dismissal and remanded for further proceedings. Id. at 1199.

         In reaching its decision, however, the Court of Appeals discussed two important points relevant here. First, it made clear that it was only deciding that the competitive-injury-via-brand-dilution theory of standing sufficed for meeting Article III’s injury-in-fact requirement. Second, that court gave passing mention to an issue raised by the IRS for the first time on appeal - namely, that AICPA’s “grievance does not arguably fall within the zone of interests protected or regulated by the statutory provision it invokes.” Id. (citations and quotation marks omitted). But because “the IRS never presented this argument to the district court, ” the D.C. Circuit declined to address it.

         Quite predictably, on remand the IRS filed a Motion for Judgment on the Pleadings, arguing that AICPA falls outside the “zone of interests” protected or regulated by the relevant provisions of the Internal Revenue Code. That Motion is now ripe.

         II. Legal Standard

         This Court evaluates a Rule 12(c) motion for judgment on the pleadings under the same standard as a Rule 12(b)(6) motion to dismiss. See Rollins v. Wackenhut Servs., Inc., 703 F.3d 122, 130 (D.C. Cir. 2012) (“Rule 12(c) motion” treated as “functionally equivalent to a Rule 12(b)(6) motion.”); Robinson-Reeder v. Am. Council on Educ., 532 F.Supp.2d 6, 12 (D.D.C. 2008). The Court must therefore “treat the complaint’s factual allegations as true . . . and must grant plaintiff ‘the benefit of all inferences that can be derived from the facts alleged.’” Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1113 (D.C. Cir. 2000) (quoting Schuler v. United States, 617 F.2d 605, 608 (D.C. Cir. 1979)) (citation omitted); see also Jerome Stevens Pharms., Inc. v. FDA, 402 F.3d 1249, 1250 (D.C. Cir. 2005). The pleading rules are “not meant to impose a great ...


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