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Home Source documents Petition for en banc rehearing, Commonwealth of Kentucky v. Yellen, No. 21-6108 (6th Cir.), Doc. 59-1 (January 18, 2023)

Petition for en banc rehearing, Commonwealth of Kentucky v. Yellen, No. 21-6108 (6th Cir.), Doc. 59-1 (January 18, 2023)

Summary

Petition for rehearing en banc in the Sixth Circuit, No. 21-6108, Commonwealth of Kentucky and State of Tennessee, Plaintiffs-Appellees, v. Janet Yellen, as Secretary of the Treasury, and others, Defendants-Appellants. The signature block lists Brian M. Boynton, Principal Deputy Assistant Attorney General. The petition states that the panel concluded, as a matter of statutory interpretation, that the Offset Provision of the American Rescue Plan Act cannot be enforced against Tennessee, and that the ruling affirmed a permanent injunction. It gives two overarching reasons the ruling is incorrect, including that the Pennhurst clear-statement principle is a tool of statutory interpretation and that Congress spoke with the requisite clarity.

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“Petition for en banc rehearing, Commonwealth of Kentucky v. Yellen, No. 21-6108 (6th Cir.), Doc. 59-1 (January 18, 2023).” Original at storage.courtlistener.com. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/petition-for-en-banc-rehearing-commonwealth-of-kentucky-v-yellen-no-21-9690bfa928/, SHA-256 151b78db7d0460876422762291fb9d38fe892e723fc6e7336053650565ba7234.

Full text

          Case: 21-6108    Document: 59-1      Filed: 01/18/2023      Page: 1




                                  No. 21-6108


             IN THE UNITED STATES COURT OF APPEALS
                     FOR THE SIXTH CIRCUIT


     COMMONWEALTH OF KENTUCKY and STATE OF TENNESSEE,
                                              Plaintiffs-Appellees,
                                        v.
JANET YELLEN, in her official capacity as Secretary of the Treasury; RICHARD K.
 DELMAR, in his official capacity as Acting Inspector General of the Department of
       the Treasury; and the U.S. DEPARTMENT OF THE TREASURY,
                                              Defendants-Appellants.


                 On Appeal from the United States District Court
                     for the Eastern District of Kentucky


                 PETITION FOR REHEARING EN BANC


                                             BRIAN M. BOYNTON
                                               Principal Deputy Assistant Attorney
                                                  General
                                             MARK B. STERN
                                             ALISA B. KLEIN
                                             DANIEL WINIK
                                               Attorneys, Appellate Staff
                                               Civil Division, Room 7245
                                               U.S. Department of Justice
                                               950 Pennsylvania Avenue, NW
                                               Washington, DC 20530
                                               (202) 305-8849
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                                  INTRODUCTION

      In the American Rescue Plan Act, Congress allocated new federal funds to States

to be expended for any of several broad purposes. As a corollary, Congress specified

in the Offset Provision that these new grants may not be used to directly or indirectly

offset a reduction in net tax revenue resulting from a change in state law. The Depart-

ment of the Treasury accordingly explained that if a State accepting funds provided by

the Act chooses to cut taxes, it must have sufficient funds of its own—either from

revenue increases or from spending cuts outside areas where it is spending the new

federal funds—to pay for any resulting reduction in tax revenue.

      The panel held, as “a matter of statutory interpretation,” that the Offset Provi-

sion cannot be enforced against Tennessee. Op. 28, 34 n.20. The panel reasoned that

this statutory restriction was not clear enough to be enforceable, under the principle set

forth in Pennhurst State School & Hospital v. Halderman, 451 U.S. 1 (1981), in part because

the panel believed that the provision was susceptible to a broader reading than the one

the Treasury Department had adopted and in part because the panel believed that Con-

gress could not leave certain details (such as the baseline for measuring a reduction in

net tax revenue) to the agency.

      This case should be reheard en banc. The panel decision is exceptionally im-

portant because it affirmed a permanent injunction against the enforcement of an Act

of Congress. And the ruling is incorrect for two overarching reasons.
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       First, the clear-statement principle articulated in Pennhurst is simply a tool of stat-

utory interpretation that the Supreme Court has used to resolve certain statutory ambi-

guities in a grant recipient’s favor, not a basis for a categorical bar against the enforce-

ment of a restriction on the use of federal funds. A court cannot properly “interpret”

a statute, as the panel did, in a way that renders it meaningless. If there were actually a

concern that the Treasury Department might interpret the Offset Provision broadly,

then the Pennhurst principle could provide reason to reject that broad interpretation.

But as the panel recognized, the Treasury Department has disavowed the broad inter-

pretation, so there is no such risk.

       Second, even if the Pennhurst principle could properly be a basis for categorically

enjoining the enforcement of a statute the application of which might in some contexts

be unclear, Congress spoke with the requisite degree of clarity when it enacted the

Offset Provision. Contrary to the panel’s understanding, the Supreme Court’s prece-

dents allow Congress to assign responsibility to the Treasury Department to implement

the provision through regulations addressing such matters as the baseline and other

mechanics of calculating a reduction in a State’s net tax revenue resulting from changes

in state law.1




       1
        If the Court grants rehearing en banc, we respectfully reserve the right to renew
our threshold argument that Tennessee’s claims are not justiciable.

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                                    STATEMENT

       1.     The American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat. 4,

created a Coronavirus State Fiscal Recovery Fund, allocating nearly $200 billion in

grants to help States and the District of Columbia mitigate the fiscal effects of the

pandemic. 42 U.S.C. § 802(a)(1); see id. § 802(b)(3)(A). Section 802 allows States to use

Fiscal Recovery Funds to cover broadly defined categories of costs incurred through

2024, including to provide assistance to households, businesses, and industries affected

by the pandemic; to provide premium pay to workers performing essential work during

the pandemic; to pay for state government services to the extent of revenue losses due

to the pandemic; and to make necessary investments in water, sewer, or broadband

infrastructure. Id. § 802(c)(1).

       In addition to identifying the permissible uses of Fiscal Recovery Funds, Section

802 includes two “[f]urther restriction[s]” on the use of the funds. 42 U.S.C. § 802(c)(2)

(heading). One is that a State may not deposit the funds into a pension fund. Id.

§ 802(c)(2)(B). The other, at issue here, is that a State “shall not use the funds … to

either directly or indirectly offset a reduction in the net tax revenue of such State” re-

sulting from a change in state law during a covered time period. Id. § 802(c)(2)(A).

       2.     Congress authorized the Treasury Department “to issue such regulations

as may be necessary or appropriate to carry out” the Fiscal Recovery Fund. 42 U.S.C.

§ 802(f). In January 2022, the Department issued a final rule implementing the statutory




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conditions on the use of Fiscal Recovery Funds, including the Offset Provision. Coro-

navirus State and Local Fiscal Recovery Funds, 87 Fed. Reg. 4338 (Jan. 27, 2022); see id. at

4423-4429.

       The regulations describe the circumstances in which a State that accepts Fiscal

Recovery Funds may permissibly cut taxes without implicating the Offset Provision.

First, because the provision applies only when a State experiences a reduction in net tax

revenue, it is not implicated at all if the State cuts taxes but maintains its prior level of

state tax revenue as the result of economic growth. See 87 Fed. Reg. at 4427. Second,

because the provision restricts only the use of the new federal funds, it is not implicated

if a State uses its own funds to offset a reduction in its net tax revenue by cutting its

expenditures of state funds in a “department, agency, or authority” where it is not

spending Fiscal Recovery Funds. See id. The rule explains that if a State were to cut its

spending of state funds in a “department, agency, or authority” in which it is using

Fiscal Recovery Funds, and if it were to use the saved state money to pay for a tax cut,

then it would be “indirectly” using Fiscal Recovery Funds to pay for the tax cut. Id. at

4427-4428. But as long as the State can pay for a tax cut with its own funds, it is free

to cut taxes.

       3.       Kentucky and Tennessee brought this action shortly after the enactment

of the American Rescue Plan Act. The operative complaint alleged that the Offset

Provision “prohibits any State accepting federal financial assistance under the Act from

lowering the tax burden on its citizens for the next four years” and that it is therefore

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unconstitutional on various grounds. Amended Complaint ¶¶ 5, 52-83, RE23, PageID

#132, 148-154. The district court enjoined the enforcement of the Offset Provision

against both plaintiffs. Kentucky v. Yellen, 563 F. Supp. 3d 647 (E.D. Ky. 2021).

       The panel vacated the injunction as to Kentucky. The panel concluded that,

although Kentucky had standing at the outset of this litigation, the Treasury Depart-

ment eliminated Kentucky’s injuries by disavowing the interpretation of the Offset Pro-

vision that Kentucky had asserted would violate the Constitution. Op. 12-20. The

panel concluded, however, that Tennessee had established jurisdiction through a decla-

ration articulating two compliance obligations supposedly imposed by the implement-

ing regulations. Op. 20-26, 34-35, 34 n.20.

       On the merits, the panel concluded “[a]s a matter of statutory interpretation[] …

that the Offset Provision does not clearly explain (1) how to calculate a ‘reduction’ in

net tax revenue, (2) how to determine whether such a reduction resulted from a tax cut,

or (3) how to tell what particular conduct constitutes an ‘indirect’ offset.” Op. 28. The

panel agreed with the government that these “indeterminacies” do not render the Off-

set Provision “‘unconstitutional,’” Op. 27, but concluded—as “a matter of statutory

interpretation”—that the Offset Provision is not clear enough to be enforced, Op. 28,

34-35, 34 n.20.

       Judge Nalbandian wrote separately, indicating that he would have affirmed the

injunction as to Kentucky (as well as Tennessee). Op. 43-51.



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                                     ARGUMENT

      Rehearing en banc is warranted in light of the importance of the panel’s decision

to affirm a permanent injunction barring enforcement of a federal statute. For the

reasons outlined below, the panel decision rests on errors of law.

      A.     The Pennhurst Clear-Statement Principle Is Not A Basis To
             Hold A Statutory Funding Condition Categorically Unen-
             forceable

      1.     The Pennhurst principle is a tool of statutory interpretation, which the Su-

preme Court and other courts have used to resolve disputes over the meaning of grant

conditions in a grant recipient’s favor. The principle is not a basis to declare a federal

statute categorically unenforceable, as the panel did.

      In Pennhurst itself, the question was whether Congress intended the provision at

issue, 42 U.S.C. § 6010, “to be hortatory” or “mandatory.” Pennhurst State Sch. & Hosp.

v. Halderman, 451 U.S. 1, 24 (1981). In adopting the former construction, the Court

relied on a close analysis of the provision’s text, structure, and legislative history. For

example, the Court emphasized that “[w]hen Congress intended to impose conditions

on the grant of federal funds, as in” other provisions of the same statute, “it proved

capable of doing so in clear terms,” and that the provision in question, “in marked

contrast, in no way suggests that the grant of federal funds is ‘conditioned’ on a State’s

funding the rights described therein.” Id. at 23. The Court found that interpretation

of the text to be well supported by the statutory structure and legislative history. Id.




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       In later cases, the Supreme Court has relied on the Pennhurst clear-statement prin-

ciple to resolve other statutory ambiguities in a grant recipient’s favor. In Arlington Cen-

tral School District Board of Education v. Murphy, 548 U.S. 291 (2006), for example, the

Supreme Court considered the meaning of the fee-shifting provision of the Individuals

with Disabilities Education Act. In interpreting that provision, the Court concluded

that it encompassed attorneys’ fees but did not clearly encompass expert fees. The

Court thus vacated an award of expert fees but did not call into question the provision’s

ongoing applicability to attorneys’ fees. Similarly, in Cummings v. Premier Rehab Keller,

P.L.L.C., 142 S. Ct. 1562 (2022), the Supreme Court interpreted the term “appropriate

relief ” in certain nondiscrimination statutes. The Court concluded that this term en-

compassed traditional contract remedies but did not clearly encompass emotional-dis-

tress damages. For that reason, the Court affirmed the dismissal of a claim for such

damages but did not call into question the ongoing availability of traditional contract

remedies under the statutes.

       The various opinions in School District of the City of Pontiac v. Secretary of the U.S.

Department of Education, 584 F.3d 253 (6th Cir. 2009) (en banc)—opinions joined, in

combination, by well over a majority of the en banc Court—embraced this understand-

ing of the Pennhurst clear-statement principle in addressing the question whether the No

Child Left Behind Act was sufficiently clear to require States accepting funds under the

Act to comply with its requirements where doing so would require them to spend ad-

ditional funds of their own. See id. at 284 (Sutton, J., concurring in the order) (“Even

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though this clear-statement rule has constitutional roots, it remains a rule of statutory

interpretation[.]”); id. at 311 (Gibbons, J., concurring in part and dissenting in part)

(similar); id. at 271-272 (opinion of Cole, J.) (applying the rule in this fashion). The

Court divided on that question of statutory interpretation, but no member of the

Court—including those who joined Judge Cole’s opinion, which would have reversed

the dismissal of the plaintiffs’ challenge to the Act—suggested that the Act’s require-

ments might be categorically unenforceable on the theory that they were ambiguous.

See id. at 278 (opinion of Cole, J.) (“States and school districts must comply with the

[Act’s] mandates to the extent of … funds received [under the Act] and must support

their own prior levels of funding as [the Act] requires.”).

       Other than in this and other challenges to the Offset Provision, no court of

which we are aware has ever relied on the Pennhurst clear-statement principle as a basis

for holding a condition on the use of federal funds to be categorically unenforceable.

       2.     The panel here agreed that “indeterminacies” in a funding condition do

not render it “‘unconstitutional,’” rejecting plaintiffs’ arguments to the contrary. Op.

27-28, 34-35, 34 n.20. But the panel nonetheless proceeded to affirm the injunction

barring any enforcement of the Offset Provision—in other words, proceeded to hold

the provision categorically unenforceable. That holding, even if framed “as a matter

of statutory interpretation” (Op. 34 n.20), is functionally indistinguishable from a hold-

ing that the provision is “unconstitutional” in all its applications, even those clearly

covered by its text.

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       Even aside from the fact that no court has ever applied Pennhurst in this way, the

panel’s rationale transgresses basic principles of judicial decisionmaking. A court can-

not properly enjoin the enforcement of a federal statute, on its face and in every con-

text, in the name of “statutory interpretation.” To do so is to “interpret” the statute to

be a nullity, notwithstanding the Judicial Branch’s duty, “‘out of respect for Congress,’”

Jones v. United States, 526 U.S. 227, 239-240 (1999), to interpret statutes in a way that

allows them to be upheld.

       The panel’s supposedly “statutory” rationale also effects an end-run around the

limitations governing facial constitutional challenges. “A facial challenge to a legislative

Act is, of course, the most difficult challenge to mount successfully, since the challenger

must establish that no set of circumstances exists under which the Act would be valid.”

United States v. Salerno, 481 U.S. 739, 745 (1987). It would be impermissible to hold that

a funding condition can never be applied as a constitutional matter—even against con-

duct that violates the condition’s plain terms—because the condition is in some respects

ambiguous. It is no more permissible to reach the same conclusion “as a matter of

statutory interpretation” (Op. 34 n.20).

       3.     The panel’s novel theory also exceeds the bounds of the cause of action

supported by the complaint. In his separate opinion, Judge Nalbandian raised the ques-

tion of “what the States’ cause of action is here.” Op. 48 n.4. The only claims alleged

in the complaint are constitutional challenges to the Offset Provision; plaintiffs never



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even attempted to identify a cause of action that would allow them to seek to enjoin a

statutory provision’s enforcement as a matter of statutory interpretation.

      4.     For those reasons, even if the panel were correct to regard the Offset

Provision as lacking the clarity required by Pennhurst, it should not have affirmed the

district court’s categorical injunction against enforcement of the Offset Provision. If

the Treasury Department actually brought a recoupment proceeding under the Offset

Provision, then a court reviewing a recoupment determination could properly apply the

Pennhurst clear-statement principle in determining whether the Department permissibly

interpreted the provision. But as the panel rightly recognized, a court cannot declare a

funding condition to be “unconstitutional” on the theory that its application might in

some contexts be unclear (and no court, to our knowledge, has ever made such a dec-

laration as to any funding condition besides this one). The panel erred in becoming the

first court ever to reach a functionally equivalent holding under the guise of statutory

interpretation. The district court’s injunction against enforcement of the Offset Provi-

sion can and should be reversed on that ground alone.

      B.     Congress Spoke With The Requisite Clarity In Enacting The
             Offset Provision

      Even if the Pennhurst clear-statement principle could properly have been a basis

for the injunction, moreover, there should be no doubt that Congress spoke with the

clarity needed under Pennhurst. There, the Supreme Court held that the provision at

issue could not be enforced against the defendant state entity because Congress did not


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specify with sufficient clarity that the provision was “mandatory” rather than “horta-

tory.” Pennhurst, 451 U.S. at 24. This Court has accordingly read Pennhurst as requiring

only that Congress “provide … ‘clear notice’” to States accepting federal funds “that

funding is conditioned upon compliance with certain standards”—i.e., that the stand-

ards are mandatory rather than merely hortatory. Cutter v. Wilkinson, 423 F.3d 579, 586

(6th Cir. 2005).2

       Here, Congress met that standard: It made clear that the prohibition against

using Fiscal Recovery Funds to pay for tax cuts is a mandatory and enforceable condi-

tion on the use of those funds. The Offset Provision parallels the statute’s other re-

striction on the use of Fiscal Recovery Funds, which prohibits the use of such funds

for deposit in a pension fund. Just as the Treasury Department may recoup Fiscal

Recovery Funds that a State spends beyond the categories of permissible use identified

in § 802(c), it may recoup funds that a State spends in contravention of the restrictions

set forth in § 802(c)(2), which serve to reinforce the requirement that funds be used

only for one of the permissible purposes set forth in § 802(c).




       2
         In so ruling, this Court followed the reasoning of the Seventh Circuit, which
accords with that of every other circuit to have addressed the same question. See Charles
v. Verhagen, 348 F.3d 601, 607 (7th Cir. 2003); see also Van Wyhe v. Reisch, 581 F.3d 639,
650-651 (8th Cir. 2009); Benning v. Georgia, 391 F.3d 1299, 1306 (11th Cir. 2004); May-
weathers v. Newland, 314 F.3d 1062, 1067 (9th Cir. 2002). The panel suggested that Cutter
did not adopt the reasoning in Charles, but we respectfully submit that Cutter quoted the
Seventh Circuit’s reasoning with approval.

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      The Supreme Court has long held that, once Congress makes clear that a condi-

tion on the use of federal funds is mandatory and enforceable, it may leave the partic-

ulars of implementing the condition to the agency charged with administering the

spending program. In Bennett v. Kentucky Department of Education, 470 U.S. 656 (1985),

for example, the Supreme Court addressed a State’s expenditure of federal funds pro-

vided under Title I of the Elementary and Secondary Education Act. It held that in

evaluating the State’s past expenditures, the Department of Education should rely on

“the statutory provisions, regulations, and other guidelines provided by the Department

at that time.” Id. at 670. The Court thus left no doubt that Congress may provide for

Spending Clause legislation, like other legislation, to be implemented by a federal agency

through regulations and sub-regulatory guidance. Indeed, the Court emphasized that

“the fact that Title I was an ongoing, cooperative program meant that grant recipients

had an opportunity to seek clarification of the program requirements.” Id. at 669. The

Court therefore rejected the argument that “ambiguities in the requirements should in-

variably be resolved against the Federal Government as the drafter of the grant agree-

ment.” Id.

      The panel identified three ways in which it regarded the Offset Provision as in-

sufficiently precise, regarding “(1) how to calculate a ‘reduction’ in net tax revenue,

(2) how to determine whether such a reduction resulted from a tax cut,” and “(3) how

to tell what particular conduct constitutes an ‘indirect’ offset.” Op. 28. But the third



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supposed imprecision is readily resolved by construing the provision in the grant recip-

ients’ favor (as the Treasury Department already has done, see 87 Fed. Reg. at 4423-

4429). Congress often uses the phrase “directly or indirectly” to signal that its objectives

cannot be circumvented through artifice. Under the SEC’s Rule 10b-5, for instance, “it

is unlawful for ‘any person, directly or indirectly, … [t]o make any untrue statement of

a material fact’ in connection with the purchase or sale of securities.” Janus Capital Grp.,

Inc. v. First Derivative Traders, 564 U.S. 135, 141 (2011) (quoting 17 C.F.R. § 240.10b-5(b)).

The Supreme Court explained that, in that provision, the phrase “directly or indirectly”

does not “broaden the meaning of ‘make’”; it “merely clarifies that as long as a state-

ment is made, it does not matter whether the statement was communicated directly or

indirectly to the recipient.” Id. at 147 n.11. So too here: The phrase “directly or indi-

rectly” does not alter the statute’s fundamental proscription against using Fiscal Recov-

ery Funds to “offset” a revenue loss from tax cuts; it simply emphasizes that that rule

cannot be circumvented through artifice, such as by cutting state spending in a depart-

ment that receives Fiscal Recovery Funds and then claiming that those state spending

cuts pay for a reduction in net tax revenue resulting from tax cuts. The phrase is not

readily susceptible to the construction the panel suggested—that a State that spends

Fiscal Recovery Funds could be considered to violate the Offset Provision whenever it

“enacts a revenue-reducing tax cut” (Op. 29-30). If Congress had intended to make

Fiscal Recovery Funds contingent on a State’s commitment not to cut taxes, Congress



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would have said so. Instead, Congress specified that it was establishing only a restriction

on the “use” of the funds. 42 U.S.C. § 802(c)(2)(A) (text and heading).

       The other two points noted by the panel involve the sort of particulars that, as

the Supreme Court has made clear, Congress can permissibly leave for an agency to

resolve rather than specifying in the statute establishing a funding condition. This Court

has properly rejected the argument that “Spending Clause legislation ‘requires a level of

specificity beyond that applicable to other legislation.’” Cutter, 423 F.3d at 586. The

panel incorrectly declared that an agency’s implementing regulations must be confined

to “arcane topics.” Op. 36. That is contrary to Supreme Court precedents, including

the recent decision upholding a regulation requiring that workers in facilities funded by

Medicare or Medicaid be vaccinated against COVID-19. Biden v. Missouri, 142 S. Ct. 647

(2022). There, the Supreme Court emphasized that the Department of Health and

Human Services “has established long lists of detailed conditions with which facilities

must comply to be eligible to receive Medicare and Medicaid funds.” Id. at 650. The

Court specifically rejected the argument that “the seemingly broad [statutory] language

… authorizes the [Department] to impose no more than a list of bureaucratic rules

regarding the technical administration of Medicare and Medicaid.” Id. at 652.

       To resolve this case in the government’s favor, the Court need not reason that

the Treasury Department’s implementing regulations “cure” (Op. 34) an otherwise

problematic ambiguity in the Offset Provision, which is why (as the panel noted, Op.



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35) the government did not make that argument. The key point is that the Offset Pro-

vision is not rendered categorically unenforceable merely because Congress vested the

Treasury Department with authority to flesh out and otherwise implement the statute

by regulation. Congress expressly authorized the Treasury Secretary to adopt regula-

tions necessary or appropriate to implement the section of the American Rescue Plan

Act that established the Fiscal Recovery Fund (including the Offset Provision). See 42

U.S.C. § 802(f). Any potential dispute about the reasonableness of the baseline year or

the mechanics of measuring a reduction in net tax revenue under the Treasury Depart-

ment’s regulation cannot provide a ground to enjoin enforcement of the Offset Provi-

sion itself, which is the only relief sought in the complaint. The omission of certain

implementation particulars from a statutory funding condition does not render the con-

dition too ambiguous to be enforced, any more than with any other statute.




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                          CONCLUSION

The Court should grant rehearing en banc.

                                         Respectfully submitted,

                                         BRIAN M. BOYNTON
                                           Principal Deputy Assistant Attorney
                                              General
                                         MARK B. STERN
                                         ALISA B. KLEIN

                                          /s/ Daniel Winik
                                         DANIEL WINIK
                                           Attorneys, Appellate Staff
                                           Civil Division, Room 7245
                                           U.S. Department of Justice
                                           950 Pennsylvania Avenue NW
                                           Washington, DC 20530
                                           (202) 305-8849
                                           daniel.l.winik@usdoj.gov




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                      CERTIFICATE OF COMPLIANCE

      This petition complies with the type-volume limit of Federal Rule of Appellate

Procedure 35(b)(2)(A) because it contains 3,794 words. The petition also complies with

the typeface and type-style requirements of Federal Rule of Appellate Procedure

32(a)(5)-(6) because it was prepared using Word for Microsoft 365 in 14-point Gara-

mond, a proportionally spaced typeface.



                                               /s/ Daniel Winik
                                               Daniel Winik


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