[00:00:04] Speaker 05:
And we'll proceed to hear argument in the last case on calendar for this morning, which is 25-273 state of Arizona versus the United States Internal Revenue Service.

[00:00:41] Speaker 04:
And we will hear first from Mr. Garrett.

[00:01:11] Speaker 01:
Good morning, your honors.

[00:01:12] Speaker 01:
May it please the court, Clinton Garrett for the state of Arizona.

[00:01:16] Speaker 01:
I'm here with my colleague, Katherine Bouton, and I'm going to endeavor to save about two minutes for rebuttal.

[00:01:24] Speaker 01:
This court said in Yellen versus Arizona that there's no reason under normal juristic standards for a court to dispute, deny, or discredit a state's standing allegations at the pleading stage.

[00:01:39] Speaker 01:
Yet in a case where the merits question is whether the IRS subjected Arizona's 2023 tax rebates to unlawful and disparate taxation, the district court found on the pleadings in this case that the IRS applied the same fact-intensive inquiry

[00:02:00] Speaker 01:
to Arizona's rebates that it had applied to all the other states that had issued refunds.

[00:02:09] Speaker 06:
Let me push back on that a little bit because we all agree that Arizona wasn't treated differently in 2023, or Arizona taxpayers weren't treated differently in 2023 than any other state, correct?

[00:02:25] Speaker 01:
Well, I would take issue with the part of the determination relating to whether... Let me be more specific so you don't have to be incredibly lawyerly in your response.

[00:02:36] Speaker 06:
In 2022, the IRS decided to treat similar claims as not generating income, correct?

[00:02:45] Speaker 06:
That's correct.

[00:02:46] Speaker 06:
Taxable income.

[00:02:48] Speaker 06:
Arizona was not a state that provided a rebate during that year.

[00:02:52] Speaker 01:
That's correct.

[00:02:53] Speaker 06:
And the IRS is, I've read its

[00:02:55] Speaker 06:
determination at the time.

[00:02:57] Speaker 06:
I don't think it could have been clearer that it said, look, this isn't a precedent.

[00:03:01] Speaker 06:
We're very busy.

[00:03:02] Speaker 06:
Don't rely on this in future years.

[00:03:05] Speaker 06:
We're just we're in the middle of a pandemic.

[00:03:08] Speaker 06:
We just don't have time to deal with this.

[00:03:11] Speaker 06:
And then the next year when it comes up, Arizona is treated the same as the only other state that falls in the category, right?

[00:03:18] Speaker 01:
But it was treated unlawfully, especially with— But unlawfully is not the standing issue.

[00:03:23] Speaker 06:
See, I'm trying to figure out—your claim of standing is that we were treated differently than other—our state's taxpayers were treated differently than other state's taxpayers.

[00:03:35] Speaker 06:
And so I'm trying to figure out whether that claim is—your eventual claim that whether the IRS was right or wrong

[00:03:41] Speaker 06:
doesn't give you standing.

[00:03:43] Speaker 06:
That's the merits claim.

[00:03:44] Speaker 06:
So I'm trying to figure out, it's the disparate treatment that might give you standing, but I don't see any allegation in this case of disparate treatment.

[00:03:54] Speaker 06:
It's just they decided in the next year, as the IRS often does, to change a policy where, and in this case, they didn't even really have a policy.

[00:04:02] Speaker 01:
Well, I think that we were treated differently with respect to a determination that the IRS didn't even have

[00:04:09] Speaker 01:
arguable discretion to treat us differently.

[00:04:12] Speaker 06:
Isn't that the merits argument?

[00:04:14] Speaker 06:
So your merits argument is they just got it wrong.

[00:04:18] Speaker 06:
This shouldn't have been treated as income.

[00:04:20] Speaker 06:
But that's not a standing argument.

[00:04:22] Speaker 06:
Your standing argument about injury to the state is that you treated our state differently than other states.

[00:04:28] Speaker 01:
But there's both the discrimination and there's also the threat to Arizona's sovereign tax policy.

[00:04:35] Speaker 06:
I want to get to that, but that's not you.

[00:04:37] Speaker 06:
You're talking about despair.

[00:04:38] Speaker 06:
I was focusing for a moment on disparate treatment.

[00:04:42] Speaker 06:
I want to get to your sovereign sovereignty claim separately, but with respect to disparate treatment, I just don't see that there's an allegation of disparate treatment.

[00:04:52] Speaker 06:
given that you were treated exactly the same as everybody else in the relevant year.

[00:04:58] Speaker 06:
And in the prior year, the IRS made it perfectly clear it wasn't making any legal determination.

[00:05:05] Speaker 06:
It was just saying, we don't have time to deal with this.

[00:05:08] Speaker 01:
But I think the error is imbuing the year with some significance that it just doesn't have legally.

[00:05:17] Speaker 01:
If the IRS had said, we're going to make a set of determinations

[00:05:21] Speaker 01:
while the COVID emergency is extant.

[00:05:27] Speaker 01:
And we're going to rely on IRC 139 before and find a presumption that payments made during this period satisfy the general welfare exception.

[00:05:43] Speaker 01:
then that might've been one thing that there might've been some reason in that, but to just look at the year and say that the COVID emergency is going to be in effect until May, 2023.

[00:05:55] Speaker 01:
And so this is only an issue for 2022 just doesn't make sense.

[00:06:01] Speaker 05:
But even if you had alleged differential treatment that taxpayers

[00:06:10] Speaker 05:
in Arizona operating under Arizona law, receiving payments under Arizona law, are not in your view being treated properly in the intersection between federal law and the relevant state laws vis-a-vis residents of other states.

[00:06:26] Speaker 05:
Why is the state of Arizona the proper plaintiff for that kind of a claim as opposed to the taxpayers?

[00:06:34] Speaker 01:
Because it poses exactly the kind of threat to sovereign state policy that this court recognized in Arizona versus Yellen.

[00:06:43] Speaker 01:
It's very similar.

[00:06:45] Speaker 05:
But in Arizona versus Yellen, there were two injuries.

[00:06:49] Speaker 05:
One was the state might actually have to pay back money.

[00:06:54] Speaker 05:
And the other was a claim of coercion to change the policy.

[00:07:01] Speaker 05:
But you don't fall into either of those buckets here.

[00:07:04] Speaker 01:
I think we do.

[00:07:04] Speaker 01:
I think the coercive effect is exactly the same.

[00:07:09] Speaker 01:
Arizona versus Yellen did involve a direct penalty.

[00:07:12] Speaker 01:
But whether you're taking the money out of public resources before it's paid or you're taking out after it's paid, a state has a finite pot of money.

[00:07:23] Speaker 01:
Say a state has $100.

[00:07:24] Speaker 01:
it wants to get the best bang for its buck with $100 it can, and it has all kinds of different policy choices.

[00:07:31] Speaker 06:
So is the loss of tax revenue, is that the sovereignty claim?

[00:07:36] Speaker 06:
See, I've just said your sovereignty claim was you're interfering with our ability to enact sovereign state policy, which in this case was the rebate.

[00:07:46] Speaker 06:
Is your sovereignty claim that you lost tax revenue?

[00:07:51] Speaker 01:
No, we have a separate claim.

[00:07:55] Speaker 06:
Focusing only on the sovereignty claim, what was it that the federal policy prevented the state of Arizona from doing that it had the sovereign right to do?

[00:08:06] Speaker 01:
It prevented us from returning money to taxpayers.

[00:08:12] Speaker 06:
You got to return every penny you wanted to to taxpayers.

[00:08:17] Speaker 06:
They may have had to treat that payment

[00:08:21] Speaker 06:
in part as federally income is taxable, but the IRS didn't do anything that prevented you from mailing the check to taxpayers, did it?

[00:08:31] Speaker 01:
It didn't prevent us from mailing a check, but in Arizona versus Yellen, the state wasn't prevented from giving a tax.

[00:08:38] Speaker 06:
As Judge Collins points out, that's a very different case.

[00:08:40] Speaker 06:
The state was being actually told it had to do something there.

[00:08:44] Speaker 06:
and adopt a policy.

[00:08:46] Speaker 05:
The claim there was, it was a coercive conditions case.

[00:08:50] Speaker 05:
It's like a South Dakota versus Dole case where I'll give you this money, but only on conditions.

[00:08:55] Speaker 05:
And that was the claim that we recognize.

[00:08:58] Speaker 05:
Here, the discrimination claim, I don't understand why your theory wouldn't overrule Florida versus Mellon on its facts because it was a discrimination claim in Florida versus Mellon.

[00:09:08] Speaker 05:
Florida had a particular tax policy and the intersection of federal law

[00:09:13] Speaker 05:
you know, versus Floridians versus people in other states was unfair.

[00:09:17] Speaker 05:
And yet the Supreme Court said no standing.

[00:09:21] Speaker 05:
So I don't understand why, even if there was a disparate treatment between Arizona and other states, why you're the correct plaintiffs.

[00:09:29] Speaker 05:
Cause Florida versus Mellon would seem to have come out the other way.

[00:09:32] Speaker 01:
Well, but Florida versus Yellen involved a uniformly enacted Mellon, an earlier secretary of the treasury.

[00:09:40] Speaker 01:
Well, it was a uniform law and the theory and the tax loss theory didn't work in that case because Florida and the other states pled only vague allegations that the inheritance tax would cause people to leave the states and that would cause tax loss injury.

[00:09:55] Speaker 01:
But Florida versus Yellen recognized that the rule of liability.

[00:10:00] Speaker 05:
But the claim in, I mean, because this is back when the Supreme Court

[00:10:04] Speaker 05:
reports used to summarize the briefs and it actually has the summary of the argument presented there on page 14.

[00:10:12] Speaker 05:
It says the act directly discriminates in its effect against the state of Florida as compared to other states because of the differential intersection of state law and its treatment of the states versus federal law.

[00:10:27] Speaker 05:
and how that fell out in different states.

[00:10:30] Speaker 05:
And the answer was the suit, nor can the suit be maintained by the state because of any injury to its citizens.

[00:10:37] Speaker 05:
They are also citizens of the United States and subject to its laws.

[00:10:41] Speaker 05:
And then that you can't assert a parent's portrait claim against the federal government, which is essentially what the discrimination claim was.

[00:10:48] Speaker 05:
So I don't understand why this discrimination claim isn't at its core.

[00:10:52] Speaker 05:
a claim on behalf of citizens, and you can't bring that against the federal government.

[00:10:56] Speaker 01:
Well, because I think in Florida versus Spelman, the effect might have been discriminatory because states had different existing laws, but you were dealing with a congressionally enacted law, which is very different than what we have here when you have an administrative decision being made within a few months.

[00:11:15] Speaker 06:
That's a merits argument.

[00:11:16] Speaker 06:
So if a taxpayer or somebody was standing were to say, IRS, you made an arbitrary decision here, I'd understand that because they would have standing.

[00:11:26] Speaker 06:
But it seems to me you can't bootstrap the merits argument into a standing argument.

[00:11:32] Speaker 01:
But how does Arizona?

[00:11:34] Speaker 05:
Your taxpayers are being mistreated.

[00:11:37] Speaker 05:
That's your claim.

[00:11:38] Speaker 05:
Why are you the plaintiff?

[00:11:40] Speaker 05:
Your taxpayers should be plaintiffs.

[00:11:42] Speaker 01:
Your Honor, because Arizona is also being misread.

[00:11:45] Speaker 01:
If Arizona wanted to issue another tax refund tomorrow and not cap it, the tax is actually paid.

[00:11:54] Speaker 01:
The authority that the IRS purported to rely on says that only the excess of that refund is going to be taxed.

[00:12:03] Speaker 06:
You can issue a rebate in any amount that you want.

[00:12:06] Speaker 06:
There's nothing the IRS has done to prevent you from doing that.

[00:12:09] Speaker 06:
You agree?

[00:12:10] Speaker 01:
I don't agree, because I think it creates exactly the same kind of coercive effect.

[00:12:13] Speaker 06:
There may be a disincentive to doing it, but there's no legal barrier, is there, to Arizona enacting whatever rebate policy it wants?

[00:12:23] Speaker 01:
No, and there was no legal barrier in Arizona versus Yale, and Arizona would just pay a penalty if it pursued a certain path.

[00:12:31] Speaker 06:
I want to give you time to get what I thought was going to be your lead argument, which is that there's an effect on state tax revenues from

[00:12:40] Speaker 06:
from this IRS policy, and that's what gives the state standing.

[00:12:44] Speaker 06:
So since you only have a few minutes left, could you address that argument?

[00:12:48] Speaker 01:
Sure.

[00:12:48] Speaker 01:
Yes, we also have the tax loss basis for standing.

[00:12:54] Speaker 01:
And I think that the lesson in the authority on tax law standing is that specific allegations of tax law standing that have economic logic behind them confer standing and more generalized allegations, allegations

[00:13:12] Speaker 01:
that lack economic logic do not confer standing.

[00:13:17] Speaker 01:
And I think that our allegations in this case supported by declarations prepared by an economist at the Arizona Department of Revenue very much fall on the side of the line where specific tax loss is credited

[00:13:39] Speaker 01:
And of course, standing does not mean you have a case on the merits.

[00:13:42] Speaker 06:
You see in New York... In fact, I must say, if we were looking at this case on the merits, I'd have real problems with your case on the merits.

[00:13:51] Speaker 01:
Yeah.

[00:13:52] Speaker 01:
In New York versus Yellen, the District Court and then the Second Circuit,

[00:13:59] Speaker 01:
found that New York and the other states had tax law standing.

[00:14:03] Speaker 01:
So that's, that's the bad news is you're just, you're challenging a uniform law.

[00:14:09] Speaker 05:
Tax loss is a lot more indirect than in Wyoming versus Oklahoma.

[00:14:16] Speaker 01:
I don't think it is because, and I think the focus can't be on the scope of the HARB.

[00:14:23] Speaker 01:
I mean, imagine if the IRS did something even more egregious and said, Arizona, your tax refunds are gonna be taxed at 80%.

[00:14:33] Speaker 01:
Or go a step further and say, the IRS said, Arizona, everybody who lives in your state is now gonna pay a tax of 80%.

[00:14:43] Speaker 01:
I would say that there's no question that that would support both tax loss injury because you would be taking money out of the state and it would also support sovereign injury because it would be, particularly if you're looking at the higher tax on the tax refund, it would create a strong disincentive to a state pursuing its favored tax policy.

[00:15:11] Speaker 02:
standing aside for just a moment, is it the state's contention that this is not income?

[00:15:19] Speaker 01:
To the extent it doesn't, the refunds don't exceed taxes paid, it's not income.

[00:15:27] Speaker 01:
And that's where the IRS went far astray and just mischaracterized

[00:15:34] Speaker 01:
established law in treating the entirety of these refunds as taxable income.

[00:15:42] Speaker 01:
And the IRS mischaracterized the Maines case in its August 2023 notice.

[00:15:52] Speaker 01:
It continued to mischaracterize it.

[00:15:54] Speaker 01:
And Judge Snow said to the IRS that your explanation doesn't meet Maines at all.

[00:16:00] Speaker 01:
Maines very plainly says

[00:16:02] Speaker 01:
that if you refund tax money, that only the excess is taxable.

[00:16:07] Speaker 01:
So if somebody has paid $500 in taxes and gets a $510 refund, absent an exclusion, that $10 might be taxable, but the $500 is non-taxable.

[00:16:23] Speaker 01:
And that's a principle that goes back to the Glenshaw glass.

[00:16:27] Speaker 01:
It's just it's not an accession to wealth and the IRS had mischaracterized that throughout and now in this court is saying well We think it's a sensible test to just tax the entire amount and that's why I said it's not a matter of discretion Excuse me, it would vary from taxpayer to taxpayer

[00:16:50] Speaker 01:
It does, but as a state, Arizona is unable to issue tax refunds without that unlawful penalty on the money it's distributing.

[00:16:59] Speaker 05:
I see that I'm... We've taken your overtime, but we asked a lot of questions, so I'll give you the two minutes you requested for rebuttal.

[00:17:07] Speaker 05:
Thank you, Your Honor.

[00:17:07] Speaker 05:
So we'll hear now from Mr. Sheehan.

[00:17:13] Speaker 00:
Good morning.

[00:17:13] Speaker 00:
May it please the court?

[00:17:14] Speaker 00:
I'm Anthony Sheehan.

[00:17:15] Speaker 00:
I represent the United States of America.

[00:17:18] Speaker 00:
The court is focused today on standing, which is the same basis on which the district court dismissed this case.

[00:17:24] Speaker 00:
Arizona alleged three injuries that it claims gives it standing.

[00:17:28] Speaker 00:
It is the position of the United States that none of those injuries would give it standing.

[00:17:33] Speaker 00:
First of all, Arizona says they suffered an injury in a loss of tax revenue, but the injury, an indirect or incidental loss of tax revenue can never give standing.

[00:17:46] Speaker 06:
This court is very... Is your position on that consistent with the Second Circuit decision, which seemed to... It may have been more direct, but it seemed to treat a loss of state tax revenue as giving rise to sufficient injury to confer standing.

[00:18:06] Speaker 00:
The Second Circuit case is definitely distinguishable from this case.

[00:18:12] Speaker 00:
First of all, in this case, we'd be following this court's

[00:18:15] Speaker 00:
precedent in the Washington case.

[00:18:17] Speaker 00:
In the Second Circuit's case, first of all, there were allegations, it was in the backdrop of against allegations that the salt limitations were there to incentivize or coerce states to alter tax policy.

[00:18:32] Speaker 00:
Secondly, in this case, in the complaint, you had a conclusory allegation that our Department of Revenue estimates $480,000.

[00:18:45] Speaker 00:
In the New York v. Yellen case, the complaint attached to it in support multiple declarations of experts that spanned according to the opinion pages 69 through 180 of the appendix.

[00:19:03] Speaker 00:
So while we disagree with the Yellen case, we think it was wrongly decided.

[00:19:07] Speaker 00:
We think this court should follow its own precedent.

[00:19:09] Speaker 00:
And in the Washington case that these incidental effects do not confer standing.

[00:19:15] Speaker 00:
In any event, the Second Circuit's case is distinguishable from this one in that regard.

[00:19:23] Speaker 00:
Also distinguishable would be Wyoming v. Oklahoma, where there was undisputed evidence of a direct impact on Wyoming's revenue from Oklahoma's tax.

[00:19:34] Speaker 06:
Well, I'm sorry.

[00:19:36] Speaker 06:
It may not be undisputed here, but it sort of strikes me as inherently obvious that while

[00:19:43] Speaker 06:
expert report may be questionable in a number of respects, Arizona must have at least lost some transaction tax revenue because these dollars were not available to the Arizona citizens to spend.

[00:19:58] Speaker 06:
It just makes perfect sense to think that even if it's only one transaction, there surely would have been a transaction in which the money was spent on a sales tax event in Arizona.

[00:20:10] Speaker 06:
So if that's the case, are we just arguing about the amount as opposed to the directness?

[00:20:16] Speaker 00:
No, we're not just arguing about the amount.

[00:20:18] Speaker 00:
And that exposes the problem with Arizona's economic logic argument and their de minimis argument.

[00:20:26] Speaker 00:
We have a very diverse country.

[00:20:29] Speaker 00:
We have a very much interconnected economy.

[00:20:33] Speaker 00:
And federal decisions, federal policies and decisions

[00:20:39] Speaker 00:
are going to have the consequence of impacting states, impacting state revenues.

[00:20:45] Speaker 00:
There is virtually nothing the federal government can do that's not going to have a negative fiscal effect on a particular state, which is why this court said, in Idaho, in the Washington case, it's entirely plausible that there might be extra emergency room visits that might have to be state paid, which is why these indirect incidental derivative effects

[00:21:07] Speaker 00:
on state revenue simply as a matter of law do not confer state standing.

[00:21:13] Speaker 00:
Otherwise, as this court said, I think echoing the Sixth Circuit, it would make a mockery of Article 3.

[00:21:20] Speaker 00:
Indeed, another example, it would be if the federal government fired a federal employee for cause.

[00:21:28] Speaker 00:
It is entirely economically logical that the state might lose some dollars of state revenue

[00:21:35] Speaker 00:
because of that firing, because of the reduction of that person's income.

[00:21:40] Speaker 00:
But that does not necessarily mean that the state can then sue the federal government on the person's behalf to have that person reinstated.

[00:21:49] Speaker 00:
This is a matter between the Arizona taxpayers and the federal government.

[00:21:54] Speaker 00:
And the state of Arizona really has no standing to insert itself into it.

[00:22:02] Speaker 00:
The second basis was the argument of disparate treatment.

[00:22:06] Speaker 05:
So I want to ask you the same question I asked to pose here.

[00:22:09] Speaker 05:
The briefs really focus on whether there was disparate treatment.

[00:22:13] Speaker 05:
But do you concede that if there was disparate treatment, then of Arizona taxpayers versus taxpayers in other states that Arizona does have standing?

[00:22:28] Speaker 00:
I would say no, Your Honor, we're talking about two different sovereigns here in that Arizona has its taxing power and the federal government has its taxing power and the relationship would be between the Arizona taxpayer and the federal government and the Arizona taxpayer.

[00:22:50] Speaker 05:
You know, we had a neutral federal statute and the IRS issued guidance that said, you know, we're going to construe this one way in this collection of states and another way in another collection of states.

[00:23:04] Speaker 05:
Just naked on its face discriminatory policy in terms of the application of a facially neutral federal statute.

[00:23:13] Speaker 05:
Can the states whose citizens are the target of that

[00:23:18] Speaker 05:
Do they have standing to bring suit to challenge that?

[00:23:22] Speaker 00:
Interesting hypothetical.

[00:23:27] Speaker 05:
They claim that that's this case.

[00:23:29] Speaker 00:
Again, Your Honor, we did brief this as there was no disparate treatment.

[00:23:36] Speaker 05:
I understand that, but I want to know whether apart from the issue of whether there's disparate treatment, there is a further standing issue.

[00:23:45] Speaker 05:
The answer is either yes or no.

[00:23:46] Speaker 05:
That's why I asked the tough hypothetical.

[00:23:49] Speaker 05:
If you had that kind of a stark treatment, would Arizona be a proper plaintiff?

[00:23:54] Speaker 05:
Yes or no?

[00:23:55] Speaker 00:
In the cases I've read on it, there was a good chance Arizona could be a proper plaintiff if it was that stark and that disparate.

[00:24:03] Speaker 00:
And what case would support that standing that you've read?

[00:24:07] Speaker 00:
It would be in our brief.

[00:24:11] Speaker 00:
in the discussion of quasi-sovereign interests.

[00:24:16] Speaker 00:
I do not have a case off the top of my head, Your Honor, I'm sorry.

[00:24:19] Speaker 05:
You know, quasi-sovereign interests is usually things that get asserted for parents' patria standing, but you can't do that against the federal government.

[00:24:28] Speaker 00:
Right, that is correct.

[00:24:29] Speaker 00:
But it's in the same portion of the brief.

[00:24:32] Speaker 00:
It would have to be a matter of, I'm trying to track that down for you right now.

[00:24:42] Speaker 00:
It would have to be the state could possibly argue if there was something as stark, as dramatic as your honor stated, the state could say that it was not being treated equally to other states on something that is that stark on its face.

[00:24:57] Speaker 00:
But that is not the case we have here.

[00:25:01] Speaker 06:
Well, then it seems to me your argument does rely on disparate treatment, the absence of disparate treatment.

[00:25:13] Speaker 06:
Because your response to Judge Collins is, well, if they'd really alleged that the state was treated disparately, they might have a claim.

[00:25:23] Speaker 06:
So in 2022, for example, if the IRS had said, we're not going to treat any of this as income except for Arizona because we don't like them, Arizona would have standing to make that claim, would it not?

[00:25:40] Speaker 00:
something that was that disparate, of course, as the district court correctly pointed out that these determinations, if when they are made, now the IRS did not make a determination on these programs for 2022.

[00:25:52] Speaker 00:
As the court has recognized, it was a forbearance because of the pandemic.

[00:25:58] Speaker 00:
You can have on these different state programs a different determination back based on facts and circumstances without.

[00:26:05] Speaker 06:
That wasn't my, that wasn't.

[00:26:06] Speaker 06:
Judge Collins is hypothetical in mind.

[00:26:09] Speaker 06:
I guess I'm just trying to point out, your argument seems to be to necessarily rely on the absence of disparate treatment, because if there had been disparate treatment, at least there would be some necessity to explain it, would there not?

[00:26:27] Speaker 00:
If there had been disparate treatment, as stark as Judge Collins has hypothetical, of there was a plain federal statute

[00:26:36] Speaker 00:
And we're just not going to apply it to Arizona because we don't like them.

[00:26:42] Speaker 00:
Thank you for that, Your Honor.

[00:26:43] Speaker 00:
I see my time is running out.

[00:26:45] Speaker 05:
Oh, no.

[00:26:48] Speaker 05:
You still have five and a half minutes.

[00:26:50] Speaker 00:
Right.

[00:26:51] Speaker 05:
I think maybe the case you were thinking of before, I mean, the Alfred Snap case refers to a quasi-sovereign interest in not being discriminatorily denied its rightful status within the federal system.

[00:27:06] Speaker 05:
Is that what you were referring to?

[00:27:09] Speaker 05:
But again, can the state assert quasi-sovereign interests against the federal government, or does it have to be sovereign interests or some other concrete interests like loss of tax revenue?

[00:27:22] Speaker 00:
Precedents are, Your Honor, a state cannot assert quasi-sovereign interests.

[00:27:25] Speaker 00:
It would have to be a sovereign interest.

[00:27:28] Speaker 00:
I would say that

[00:27:35] Speaker 00:
the certainly Arizona state taxpayers could come in and say, you're not applying this law to us fairly because they are the ones who have the relationship with the federal government and the federal taxing authority with regard to federal taxes.

[00:27:56] Speaker 05:
If I may, moving on to- So why don't you tell us why you think there wasn't a discriminatory impact?

[00:28:03] Speaker 00:
Two reasons.

[00:28:03] Speaker 00:
First of all, we'll start with the mains case.

[00:28:06] Speaker 00:
The IRS is policy in IRS is reading of mains is that if you're going to, if a state is going to issue a payment, I remember mains deals with tax credits, which are shown on returns.

[00:28:18] Speaker 00:
If you're going to, if a state is going to issue a payment to its residents, it has to be capped.

[00:28:24] Speaker 00:
If it's not capped, it is not treated as a refund.

[00:28:26] Speaker 00:
Now Arizona can disagree with that and Arizona taxpayers can disagree with that, but that goes to the merits.

[00:28:33] Speaker 00:
As terms of standing, four states capped their payments.

[00:28:37] Speaker 00:
They were treated as having issued refunds.

[00:28:39] Speaker 00:
Arizona didn't cap.

[00:28:41] Speaker 00:
It was not.

[00:28:42] Speaker 00:
There was no disparate treatment.

[00:28:43] Speaker 00:
That policy was applied uniformly to everybody.

[00:28:47] Speaker 00:
We go to the other 17 states.

[00:28:49] Speaker 00:
And as the court has already recognized, the press release issued in February, 2023, dealing with tax year 2022.

[00:28:58] Speaker 00:
Now every tax year is a new liability and a new cause of action.

[00:29:04] Speaker 00:
It said, we just cannot deal with these.

[00:29:07] Speaker 00:
It did not make a determination on the merits.

[00:29:10] Speaker 00:
That has been consistent throughout.

[00:29:11] Speaker 00:
It is shown in the language of that news release.

[00:29:13] Speaker 00:
It is shown in the letters that the IRS sent to Arizona before this case even started.

[00:29:20] Speaker 00:
It was a one time limited to 2022 forbearance of enforcement because of the necessities of tax administration.

[00:29:31] Speaker 00:
If Arizona had issued its payment in 2022, there's no reason to believe it would not have been the 18th state in that group.

[00:29:39] Speaker 00:
On the other hand, in 2023, for tax year 2023, which is when this was issued, the only other state to issue a payment was Minnesota.

[00:29:48] Speaker 00:
The IRS at that point, in the calmer environment, analyzed it on the merits, and Minnesota's payments were also not treated, were also considered taxable.

[00:30:00] Speaker 00:
This is dealing with a one-time forbearance.

[00:30:04] Speaker 00:
It did not create precedent.

[00:30:06] Speaker 00:
It did not create a right.

[00:30:08] Speaker 00:
Arizona is not being treated differently based on the circumstances.

[00:30:14] Speaker 00:
The third argument they make is that they had a sovereign injury to their taxing power and their spending power.

[00:30:21] Speaker 00:
That is simply not the case.

[00:30:23] Speaker 00:
Arizona can still tax as it wants.

[00:30:25] Speaker 00:
It can still spend as it wants.

[00:30:27] Speaker 00:
It can still issue whatever payments it wants.

[00:30:30] Speaker 00:
Really, what it's arguing is that, essentially, it can issue whatever money it wants from its fiscal aquifer.

[00:30:37] Speaker 00:
It's just saying that not enough money percolated back down into the aquifer.

[00:30:41] Speaker 00:
But that goes right back to the first argument, the loss of tax revenue, that it would never give.

[00:30:51] Speaker 00:
And the loss of tax revenue, this indirect derivative

[00:30:57] Speaker 00:
tangential loss of revenue can never give a state standing, because if it did, states would always have standing.

[00:31:04] Speaker 00:
And as this Court has said in Washington, it would make a mockery of Article 3.

[00:31:10] Speaker 00:
And if there are no further questions, I would rest on the brief for the rest of our arguments and ask the Court to affirm.

[00:31:18] Speaker 05:
All right.

[00:31:19] Speaker 05:
Thank you, counsel.

[00:31:19] Speaker 05:
We'll hear rebuttal.

[00:31:28] Speaker 01:
Your honors, Mr. Sheehan conceded that, well, maybe if the alleged discrimination was more dramatic or more stark than Arizona probably would have standing.

[00:31:41] Speaker 01:
We don't have any discovery in this case.

[00:31:43] Speaker 01:
We don't have the administrative record.

[00:31:46] Speaker 01:
So maybe we'll find that it is pretty dramatic.

[00:31:50] Speaker 01:
We have no idea.

[00:31:51] Speaker 06:
I think he did that in response to our hypothetical questions about discrimination.

[00:31:56] Speaker 06:
His first point was there was no discrimination at all.

[00:32:00] Speaker 06:
Could you respond to that?

[00:32:03] Speaker 01:
Well, again, that's just wrong.

[00:32:05] Speaker 01:
And I would, again, urge the court to take a look at the Maines case and what they are.

[00:32:14] Speaker 05:
The point is that, yes, you have a just you have a genuine dispute about how to read Maines.

[00:32:19] Speaker 05:
They've read it one way.

[00:32:20] Speaker 05:
It has to be capped, no cap, disallowed.

[00:32:23] Speaker 05:
And that's the rule they applied.

[00:32:24] Speaker 05:
Four landed one way, you landed on the other side.

[00:32:27] Speaker 05:
How is that discrimination?

[00:32:28] Speaker 05:
It may be wrong to do it, but it's adopting a position and applying it equally.

[00:32:34] Speaker 05:
That position may be wrong, but it's equally applied.

[00:32:38] Speaker 01:
I would take issue with that because four of the 21 states were told that their tax rebates wouldn't be taxed under mains unless the taxpayers had deducted state taxes and received a federal deduction conferring a benefit.

[00:33:01] Speaker 01:
um, for their tax payments.

[00:33:03] Speaker 01:
So those states, those four states received the lawful application of mains and then Arizona did not receive the lawful application of mains.

[00:33:13] Speaker 01:
And that just seems to me to be pretty stark discrimination.

[00:33:19] Speaker 06:
Um, I think in your view that every time the IRS is wrong in its application of

[00:33:27] Speaker 06:
in where it draws a dividing line, there's unlawful discrimination?

[00:33:32] Speaker 01:
Well, it depends on the nature of how the IRS gets it wrong, I think.

[00:33:42] Speaker 01:
We've alleged that the IRS

[00:33:46] Speaker 01:
discriminated against Arizona in significant detail.

[00:33:49] Speaker 01:
We showed how the other states received favorable treatment when their rebates were structured in a way materially identical to Arizona's.

[00:34:00] Speaker 01:
And then that leaves the IRS with these arguments

[00:34:03] Speaker 01:
about the significance of the tax year and about conferring forbearance and what the heart of the emergency was.

[00:34:14] Speaker 01:
And I'm not sure how any of that is relevant when Arizona issued its refund within the COVID emergency, just like all the other states did.

[00:34:23] Speaker 01:
At a minimum, I think we have arguments and issues of fact to be resolved with this case going forward.

[00:34:33] Speaker 05:
Thank you, counsel.

[00:34:35] Speaker 05:
The case will thank counsel on both sides for their helpful arguments in this case.

[00:34:40] Speaker 05:
And the case just argued will be submitted.

[00:34:43] Speaker 05:
And the court for this session for this day will stand in recess.

[00:34:50] Speaker 00:
Thank you.