3rd Circuit: IRS and H&R Block Cannot Be Sued Over E-Filing Fees (The Legal Intelligencer)
March 5, 2010

By Shannon P. Duffy
The Legal Intelligencer

March 05, 2010

The fees charged by H&R Block and other tax preparers for electronic filing of federal tax returns are not illegal and the IRS's agreement with the preparers didn't violate antitrust laws, the 3rd U.S. Circuit Court of Appeals has ruled.

In its 27-page opinion in Byers v. Intuit Inc., a unanimous three-judge panel refused to revive a proposed nationwide class action against H&R Block, Intuit Inc. and the Internal Revenue Service brought by taxpayers who claim the IRS effectively "outsourced" its statutory responsibility for accepting and processing electronically filed tax returns to private companies.

Plaintiffs attorneys Thomas Martin, Alan M. Feldman and Thomas More Marrone of Feldman Shepherd Wohlgelernter Tanner Weinstock & Dodig complained in the suit that the IRS agreed to prohibit individual taxpayers from filing electronically, instead requiring that all e-filing be handled by registered tax preparers that had joined the "Free File Alliance."

In 2005, the suit alleged, the IRS agreed to modify the deal to limit the number of taxpayers who would be allowed to e-file for free in order to guarantee that the program would remain lucrative to the tax preparers.

The agreement, the suit alleged, amounted to "an illegal horizontal agreement" among the FFA members to restrict output, which had the effect of causing the plaintiffs to pay "supracompetitive prices" for e-filing and related services.

In the first round of the litigation, Senior U.S. District Judge Thomas N. O'Neill Jr. dismissed the suit after finding that the tax preparers were entitled to "implied antitrust immunity" and were therefore shielded from antitrust liability, since their anti-competitive behavior was required by the IRS.O'Neill also dismissed an Administrative Procedures Act claim against the IRS after finding that the agency cannot be sued for the fees charged by the tax preparers because the Independent Offices Appropriations Act (IOAA), also known as the "federal user charge statute," cannot be applied to fees charged by a private company unless the company is performing a service that a federal agency is statutorily required to perform.

The tax preparers, O'Neill found, were also entitled to dismissal of the IOAA claim because the law regulates only government agencies and simply doesn't apply to private entities. On appeal, the plaintiffs argued that O'Neill failed to recognize that the suit qualified for several important legal exceptions that would have preserved the claims.

Since the tax preparers provided e-filing services pursuant to agreements with the IRS, the plaintiffs argued, the IOAA applies to any fees that the tax preparers charged under the exception that allows the federal user charge statute to apply to private entities that perform governmental duties. The 3rd Circuit disagreed, finding that the plaintiffs had confused the roles of the IRS and the tax preparers.

Writing for the court, U.S. Circuit Judge Leonard I. Garth found that the plaintiffs' argument "erroneously conflates the statutory duty delegated to the IRS -- i.e., collecting and processing tax returns -- with the services provided by the [tax preparers] -- i.e., preparing and filing the returns." By offering e-filing services to the public, Garth said, the tax preparers "do not perform any of the tasks statutorily assigned to the IRS, but rather serve the very same private-sector functions as accountants (who aid with preparation of returns) and delivery services such as Federal Express (which aid with the filing of returns)."

Garth, who was joined by Judges Thomas L. Ambro and Jane R. Roth, said the plaintiffs "cannot sustain an argument that the IRS effectively controlled the conduct of the FFA members" since the plaintiffs had acknowledged that, despite the agreement with the IRS, the FFA members were "free to charge whatever they saw fit for their e-filing services."
The plaintiffs also argued that O'Neill erred in failing to apply the Otter Tail exception in his analysis of the antitrust claim.

In its 1973 decision in Otter Tail Power Co. v. United States, the U.S. Supreme Court established an exception to the doctrine of implied antitrust immunity, holding that even when the circumstances otherwise dictated that a private entity was entitled to implied antitrust immunity, the protection would not be accorded if: (1) the private entity had "insisted" on anti-competitive restrictions in its contract with a government agency; and (2) those restrictions "hindered" the government.
Garth found that the exception didn't apply because the plaintiffs couldn't prove either prong of the test.

Plaintiffs lawyers pointed to a report from the Treasury Inspector General for Tax Administration (TIGTA), which, they said, revealed that the 2005 agreement came at the insistence of the FFA members and had the effect of hindering the IRS's ability to fulfill the goal to increase electronic filing.

Garth disagreed, finding that only the IRS can declare its policy and that the agency, in its official response to the TIGTA report, had flatly contradicted the findings.

"The IRS's official stance," Garth wrote, " ... is, under the law, the final word as to whether the [provisions of the 2005 agreement] were foisted upon the IRS at the insistence of the FFA members, and whether they have proved a hindrance."
Martin, who argued the appeal for the plaintiffs, declined to comment on the ruling.

Attorney Judith A. Hagley of the Justice Department's tax division argued the appeal for the government. Attorney Stephen M. Ryan of McDermott Will & Emery in Washington, D.C., argued the appeal for FFA.

H&R Block was represented in the appeal by Laurence Z. Shiekman and Larry R. Wood Jr. of Pepper Hamilton in Philadelphia. Intuit was represented by lawyers from Morgan Lewis & Bockius including Aaron B. Hewitt and Scott A. Stempel in Washington, D.C.; and Jami W. McKeon in San Francisco.