By Patrick Temple-West WASHINGTON (Reuters) - The Obama administration on Tuesday defended its effort to regulate the tax return preparation business for the first time in U.S. history, basing its case largely on a 19th century law dealing with horses lost or killed in the Civil War. At an appellate court hearing on a challenge brought by libertarian lawyers challenging the administration, Justice Department Tax Division lawyer Gilbert Rothenberg said: "I hate to beat a dead horse, especially one from the Civil War era." But he explained that the administration sees the "Horse Act of 1884" as providing ample authority for the U.S. Internal Revenue Service to regulate the tens of thousands of preparers who fill out millions of Americans' federal tax returns. A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit heard the administration's argument. Rothenberg said the IRS should be allowed to force tax return preparers - who are now unregulated - to pass a competency test and take annual continuing education classes. But the Institute for Justice, a libertarian advocacy law firm, disagreed. "Congress never gave the IRS authority to regulate tax preparers," said Dan Alban, an attorney for the institute. The case has broad implications for the industry, which includes H&R Block Inc, a few mid-tier companies and thousands of tiny, mom-and-pop firms. A decision from the judges is still months away. In oral arguments, the judges - all appointed by Republican presidents - gave no clear sign of how they will rule, yea or neigh. But they did question why the IRS was citing an 1884 law to justify trying to police tax return preparers in 2013. LEGAL REPRESENTATION AT ISSUE After the Civil War, many Americans brought war loss claims against the U.S. government, often for dead or missing horses. A post-war industry emerged of agents who would press war loss claims for a fee, usually a percentage of the claim collected. Soon, claim values were being fraudulently inflated. In response, the government started regulating these intermediaries, barring unscrupulous ones and certifying honest ones as "enrolled agents," a title that is still used today by people who represent clients in matters before the IRS. The IRS is arguing that tax return preparers represent their customers in much the same way that enrolled agents do, so the agency should be able to expand regulation to include preparers. But the Institute for Justice is arguing that tax return preparers do not carry out the same level of representation, but rather merely provide a paid service for clients. "Preparing a tax return is not a representative act," Alban said. "It is performing a service, certainly, but there's no representation." More than 78 million Americans in 2011 paid someone to prepare their tax returns. The industry posted estimated revenue this year of $9.4 billion. The Institute sued in March 2012 to block the IRS's regulations and won a district court ruling in January halting parts of the agency's program. The IRS appealed. KOCHS HELPED FUND CHALLENGER Based in Arlington, Va., the institute litigates over issues such as private school vouchers and eminent domain. It was begun in 1991 with funding from wealthy industrialists and conservative activists David and Charles Koch. Sabina Loving, a Chicago tax preparer, is the lead plaintiff in the case. She was not present at the oral arguments. Some of the tax experts who attended said the judges seemed skeptical of the IRS's argument. "Clearly, they were leaning toward Loving," said Don Williamson, a tax accountant and executive director of American University's Kogod Tax Center. "It looks like a good day for Mr. Alban," said Robert Kerr, senior director of government relations for the National Association of Enrolled Agents, a tax-preparers trade group. Kathryn Keneally, head of the Justice Department tax division, declined to comment on the oral arguments while leaving the court room. The case is Sabina Loving et al v. Internal Revenue Service, U.S. Court of Appeals for the District of Columbia Circuit, No. 13-5061. (Editing by Kevin Drawbaugh and Leslie Gevirtz)
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