Cohen v. U.S. (CA Dist Col 07 01/2011) 108 AFTR 2d ¶2011-5008
Granting IRS's request for a rehearing en banc, the Court of Appeals for the District of Columbia has once again ruled, over a strong dissent, that it has authority to hear a case challenging IRS's procedure for obtaining a refund of improperly assessed telephone excise taxes.
Background. Until it issued Notice 2006-50, 2006-25 IRB 1141, despite a veritable tidal wave of court opinions that overwhelmingly found against IRS and seemingly clear statutory language to the contrary, IRS had staunchly maintained that the Code Sec. 4251 3% excise tax on long-distance telephone communications applied where the toll charge varied with either distance or elapsed time of the call, rather than when it only varied with both distance and elapsed time. In Notice 2006-50, IRS announced that it would stop collecting the disputed excise tax and provide a one-time exclusive mechanism for refund of taxes paid between Feb. 28, 2003 and Aug. 1, 2006 under which taxpayers could file claims on their income tax returns requesting either a full refund (if they retained substantiating records) or a “safe harbor” amount.
The Code strictly limits the circumstances under which a suit to enjoin the assessment or collection of any tax is permitted. Under Code Sec. 7421(a), no suit for the purpose of restraining the assessment or collection of any tax can be maintained in any court by any person, whether or not that person is the one against whom the tax is assessed, except as otherwise provided. This rule is sometimes referred to as the Anti-Injunction Act, or AIA. A taxpayer must file a refund claim with IRS before starting a suit for refund (or credit). (Code Sec. 7422(a))
Litigation history. Various lawsuits challenged the lawfulness and adequacy of the telephone excise tax refund process. A Multidistrict Litigation (MDL) Panel consolidated and transferred three district court cases, Cohen, Sloan, and Gurrola, into an MDL proceeding before the district court for the District of Columbia. In each of the three consolidated suits, the appellants purported to represent a class of taxpayers who lacked the resources or expertise necessary to individually seek a refund under Notice 2006-50, or amounts at stake sufficient to make individual actions worthwhile. The appellants claimed Notice 2006-50 was substantively flawed because it under-compensated many taxpayers for the actual excise taxes paid and was procedurally flawed because IRS did not comply with the notice and comment procedures required under the Administrative Procedure Act (APA) when it issued the Notice.
The district court dismissed the cases after concluding the appellants failed to exhaust the administrative remedies for their refund claims and failed to state valid claims under federal law. A divided Court of Appeals for the District of Columbia reversed, holding that Notice 2006-50 constituted final agency action reviewable under the APA. (Cohen v U.S., (CA Dist Col, 08/07/2009) 104 AFTR 2d 2009-5841) The majority rejected two challenges to the court's jurisdiction. In the majority's view, neither the AIA nor the Declaratory Judgment Act (DJA), which authorizes declaratory relief except “with respect to Federal taxes,” stripped the court of jurisdiction to hear the appellants' claims for equitable relief. Although the text of the AIA and DJA differ, the majority reasoned, circuit precedent held the two “coterminous.” Thus, if one did not bar the appellants' APA claims, neither did the other.
New decision. In 2009, IRS petitioned the appellate court for rehearing en banc. The court granted the petition, and has now, over a vigorous dissent, ruled that it has federal question jurisdiction and that neither the AIA nor the DJA provided a limitation on the court's exercise of it. Because the appellants had no other adequate remedy at law, it directed the district court to consider the merits of their APA claim on remand.
The appellate court held that the suit at hand didn't violate the AIA because it did not seek to restrain the “assessment or collection of any tax.” IRS previously assessed and collected the excise tax at issue. The money was in the U.S. treasury, and the legal right to it was previously determined. The court said the suit was strictly about the procedures under which IRS will return taxpayers' money. The court said that “whether IRS's procedures are upheld or the appellants succeed in forcing a different set of procedures, those procedures are not retroactive; they do not and cannot affect the assessment or collection of taxes after the fact.”
The appellate court also turned aside IRS's assertion that Code Sec. 7422(a) provided the appellants the relief they sought. The court held that Code Sec. 7422(a) didn't apply, as the appellants' suit was an APA action questioning the administrative procedures IRS established to allow taxpayers to request refunds for the wrongfully collected excise tax. It wasn't a suit for recovery of taxes.
Summing up, the appellate court declared that the suit wasn't about the excise tax, its assessment, or its illegal collection, but rather was about the “virtual obstacle course” IRS established for taxpayers to get their money back, and the decisions IRS made while setting up that course.
References: For statutory ban on injunctions against assessment and collection of tax, see FTC 2d/FIN ¶V-5701; United States Tax Reporter ¶74,214.