Cohen v. United States, No. 08-5088

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Writing for the CourtSENTELLE
Docket NumberNo. 08-5088,Consolidated with 08-5093, 08-5174
Decision Date01 July 2011


No. 08-5088
Consolidated with 08-5093, 08-5174


Argued September 29, 2010.
Decided: July 1, 2011.

Appeals from the United States District Court for the District of Columbia
(Nos. 1:07-cv-00051, 06-cv-00483, 07-cv-00050)

On Petition for Rehearing En Banc

Thomas Goldstein argued the cause for appellants. With him on the briefs were Isaac J. Lidsky, Michael A. Bowen, Marc B. Dorfman, Jonathan W. Cuneo, Robert J. Cynkar,William H. Anderson, Nicholas E. Chimicles, Benjamin F. Johns, Henry D. Levine, Charles Tiefer, Mark C. Rifkin, Mark Griffin, and Randy J. Hart.

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Kristin E. Hickman was on the brief of amicus curiae in support of appellants.

Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Ronald C. Machen, Jr., U.S. Attorney, and Teresa E. McLaughlin and Ellen P. DelSole, Attorneys. Kathleen E. Lyon, Attorney, and R. Craig Lawrence, Assistant U.S. Attorney, entered appearances.


Opinion for the Court filed by Circuit Judge BBOEWN.

Dissenting opinion filed by Circuit Judge KAVANAUGH, with whom Chief Judge SENTELLE and Circuit Judge HENDERSON join.

BROWN, Circuit Judge: After illegally collecting a three percent excise tax, the Internal Revenue Service ("IRS" or "the Service") created a refund procedure for taxpayers to recoup their money. That procedure, Appellants argue, is unlawful. We have no occasion to visit the merits of Appellants' claims, as we granted rehearing en banc only to determine whether we have the authority to hear the case. We do.

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The internal Revenue Code imposes a three percent excise tax on phone calls. 26 U.S.C. § 4251. Telephone service providers collect the tax and pay it over to the IRS. See id. § 4291. Individual taxpayers are not required to calculate their own excise tax liability or to maintain adequate supporting documentation to do so. See Rev. Rul. 60-58, 1960-1 C.B. 638. The Code taxes communications charges that are based upon distance and transmission time. 26 U.S.C. § 4252(b). Decades ago, these requirements posed no problem, as phone companies based their billing on multiple factors, including the key components of distance and time. Nat'l R.R. Passenger v. United States, 431 F.3d 374, 375 (D.C. Cir. 2005). The telecommunications revolution has changed all that. Many consumers now pay strictly based on transmission time; frequently, rates no longer vary based on the distance of a call. Id. Despite recognizing this shift, the IRS continued to collect taxes on all long-distance communications. See I.R.S. Notice 2005-79, 2005-2 C.B. 952 ("Notice 2005-79"); see also Rev. Rul. 79-404, 1979-2 C.B. 382 (determining communication between ships at sea or other offshore facilities and telephone subscribers in the United States were subject to the excise tax though the charges varied only based on transmission time).

Multiple corporate taxpayers brought refund suits claiming the excise tax was illegal and several circuits, including this one, concluded time-only rate structures render calls nontaxable under the Code. Nat'l R.R. Passenger,

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431 F.3d at 375-76. While these lawsuits proceeded, the IRS remained adamant regarding the continuing applicability of the excise tax. After it lost an appeal in the Eleventh Circuit, see Am. Bankers Ins. Group v. United States, 408 F.3d 1328 (11th Cir. 2005), the Service declared it would continue to litigate the applicability of the tax and directed phone service providers to continue collecting the tax, even from individuals in the Eleventh Circuit's jurisdiction. Notice 2005-79. The IRS further ordered taxpayers to continue paying the tax, but permitted place-holder refund claims "for overpayments." Id. Taxpayers were advised, however, the Service would not process place-holder refund claims while related cases remained pending in federal courts of appeals. Id.

The IRS lost in each of the five circuits that considered its application of § 4251. All held the tax inapplicable to long-distance rates calculated without reference to distance. Reese Bros., Inc. v. United States, 447 F.3d 229, 231 (3d Cir. 2006); Fortis, Inc. v. United States, 447 F.3d 190, 191 (2d Cir. 2006); Nat'l R.R. Passenger, 431 F.3d at 374; OfficeMax, Inc. v. United States, 428 F.3d 583, 585 (6th Cir. 2005); Am. Bankers Ins. Group, 408 F.3d at 1338. On May 26, 2006, after the last of these rulings came down, the IRS issued Notice 2006-50, discontinuing the excise tax for phone charges based solely on transmission time. See I.R.S. Notice 2006-50, 2006-1 C.B. 1141 ("Notice 2006-50").2

Notice 2006-50 provided a one-time exclusive mechanism for taxpayers to obtain a refund for excise taxes erroneously collected between February 28, 2003, and August 1, 2006.3

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Id. § 5(a) (agreeing to provide refund "if the taxpayer requests the credit or refund in the manner prescribed in this notice"); id. § 5(g) (refusing to process refund requests "that do not follow the provisions of this notice"). Although the IRS collected the excise tax through telephone service providers, Notice 2006-50 required individual taxpayers to request a refund on their 2006 federal income tax returns. Id. § 5(a)(2). Taxpayers who otherwise did not need to file income tax returns nevertheless had to file a return in order to submit a refund request. Id. Taxpayers could request either a "safe harbor" amount, which required no documentation, or the actual amount of tax they paid, for which the IRS could demand documentation.4 Id. § 5(c); Notice 2007-11, § 11 (setting the safe harbor at between $30 and $60 depending on the number of exemptions and refusing to require telephone

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companies to supply customers with billing records during the refund period).

various lawsuits challenged the lawfulness and adequacy of the refund process. See In re Long-Distance Tel. Serv. Fed. Excise Tax Refund Litig., 469 F. Supp. 2d 1348 (J.P.M.L. 2006) (Transfer order). The Multidistrict Litigation ("MDL") Panel consolidated and transferred three district court cases, Cohen, Sloan, and Gurrola into an MDL proceeding before the United States District Court for the District of Columbia. Id. at 1350. In each of the three consolidated suits, 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. 5 Appellants claim Notice 2006-50 is substantively flawed because it undercompensates many taxpayers for the actual excise taxes paid and is procedurally flawed because the IRS did not comply with the notice and comment procedures required under the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq., when it issued the notice. See Second Amended Complaint ¶ 2 ("The I.R.S.'s program is unlawful because it fails to compensate consumers for anything approaching the full amount of the money illegally taken, is without a basis in law, is arbitrary in the extreme, and was promulgated without any of the procedures that are required to accompany agency rulemaking.").

The district court dismissed the cases after concluding Appellants failed to exhaust the administrative remedies for

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their refund claims and failed to state valid claims under federal law. In re Long-Distance Tel. Serv. Fed. Excise Tax RefundLitig., 539 F. Supp. 2d 281, 287 (D.D.C. 2008) ("[N]o refund claim, no refund suit."). That court further found Notice 2006-50 was an "internal policy," did not adversely affect Appellants, and therefore constituted unreviewable agency action. Id.; see 5 u.S.C. § 702; Bennett v. Spear, 520 U.S. 154, 177-78 (1997) (requiring "final agency action" to be the "consummation" of agency decisionmaking and either affect legal "rights or obligations" or result in "legal consequences"); Trudeau v. FTC,456 F.3d 178, 185 (D.C. Cir. 2006) (explaining the "final agency action" requirement is not jurisdictional, but rather a limitation on an APA cause of action). The district court also ruled Appellants' APA claims for injunctive and declaratory relief were mooted by the IRS's decision to discontinue the tax on time-based phone charges. 539 F. Supp. 2d at 287.

A divided panel of this court reversed, holding Notice 2006-50 constituted final agency action reviewable under the APA. Cohen, 578 F.3d 1, 4-14 (D.C. Cir. 2009). Before doing so, the majority rejected two challenges to the court's jurisdiction. In the majority's view, neither the Anti-Injunction Act ("AIA"), which provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person," 26 u.S.C. § 7421(a), nor the Declaratory Judgment Act ("DJA"), which authorizes declaratory relief except "with respect to Federal taxes," 28 U.S.C. § 2201(a), stripped the court of jurisdiction to hear Appellants' claims for equitable relief. Cohen, 578 F.3d at 5. Although the text of the AIA and DJA differ, the majority reasoned, our circuit precedent held the two "coterminous." Id. Thus, if one did not bar Appellants' APA claims...

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