In re Long–Distance Tel. Serv. Fed. Excise Tax Refund Litig.

• Citation: 853 F.Supp.2d 138,109 A.F.T.R.2d 2012
• Decision Date: 10 April 2012
• Docket Number: Miscellaneous Action No. 07–014 (RMU).
• Parties: In re LONG–DISTANCE TELEPHONE SERVICE FEDERAL EXCISE TAX REFUND LITIGATION.
• Court: United States District Courts. United States District Court (Columbia)

853 F.Supp.2d 138

109 A.F.T.R.2d 2012-1736

In re LONG–DISTANCE TELEPHONE SERVICE FEDERAL EXCISE TAX REFUND LITIGATION.

Miscellaneous Action No. 07–014 (RMU).

United States District Court, District of Columbia.

April 10, 2012.

Mark D. Griffin, Griffin Law Firm, Orange, OH, Richard F. Scruggs, Sidney A. Backstrom, Scruggs Law Firm, PA, Oxford, MS, Robert G. Smith, Lewis Brisbois Bisgaard & Smith LLP, San Diego, CA, Jonathan Watson Cuneo, Charles J. Laduca, William H. Anderson, Cuneo Gilbert & LaDuca, LLP, Steven N. Berk, Berk Law LLC, Washington, DC, Benjamin F. Johns, Nicholas E. Chimicles, Chimicles & Tikellis, LLP, Haverford, PA, Christopher Weld, Jr., Kevin T. Peters, Todd & Weld, LLP, Boston, MA, Robert J. Cynkar, Cuneo Gilbert & LaDuca, LLP, Alexandria, VA, for Plaintiffs.

Brian H. Corcoran, Geoffrey John Klimas, Joseph E. Hunsader, U.S. Department of Justice, Sean A. Lev, Michael K. Kellogg, Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC, Henk J. Brands, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, DC, Daniel P. Collins, Munger, Tolles & Olson LLP, Alejandro N. Mayorkas, Sandra Sepulveda, O'Melveny & Myers LLP, Michael B. Carlinsky, Quinn Emanuel Urquhart & Sullivan LLP, Los Angeles, CA, Burton A. Gross, Munger, Tolles & Olson LLP, San Francisco, CA, Patrick S. Wolleson, Breithaupt, Dunn, Du Bos, Shafto & Wolleson, LLC, Monroe, LA, Susan L. Saltzstein, Rebecca Min, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, John W. Rogers, Thompson Coburn LLP, St. Louis, MO, for Defendants.

MEMORANDUM OPINION

Granting the Defendant's Motion for Determination of Mandate's Scope; Remanding to the Internal Revenue Service and Prospectively Vacating Notice 2006–50

RICARDO M. URBINA, District Judge.

I. INTRODUCTION

The plaintiffs challenge the adequacy of a tax refund process instituted by the Internal Revenue Service (“IRS” or “the defendant”). The court previously dismissed the plaintiffs' Administrative Procedure Act (“APA”) claim, but the Circuit remanded, instructing this court to consider the merits of the plaintiffs' APA claim in accordance with the Circuit's opinion. The matter is now before the court on the defendant's motion to determine the effect of the Circuit's opinion on the plaintiffs' APA claim.¹

The parties agree that the Circuit's opinion may suggest that the defendant violated the APA by failing to comply with the required notice-and-comment procedures. The parties further agree that if that is the case, then the only remaining issue for this court to decide is the appropriate remedy. As discussed below, the court determines that the Circuit's opinion, in conjunction with the parties' representations, indicate that a procedural APA violation occurred. Furthermore, the court concludes that a prospective vacatur is an appropriate remedy.

II. BACKGROUND

For decades, the IRS has collected a 3% excise tax on all long-distance communications. Cohen v. United States, 650 F.3d 717, 719–20 (D.C.Cir.2011). With technological advancements, the IRS was unable to base the tax on distance and therefore began to base the tax solely on the duration of a call. Id. at 720. Litigation ensued, challenging the legality of the tax based solely on the duration of a call. Id. Eventually, five circuits held that the tax was illegal, and the IRS thus discontinued the excise tax based solely on transmission time. Id.

The IRS provided notice of a one-time exclusive mechanism for taxpayers to obtain a refund for those excise taxes erroneously collected between February 2003 and August 2006 (“Notice 2006–50”). Id.Notice 2006–50 required that individual taxpayers request this refund on their 2006 federal income tax returns. Id. at 721.

Various lawsuits arose challenging the adequacy of the refund process. Id. The Judicial Panel on Multidistrict Litigation transferred two of those cases, Cohen v. United States, Civ. No. 05–1237 (E.D.Wis.2005) and Gurrola v. United States, Civ. No. 06–3425 (C.D.Cal.2006), to this court, where they were consolidated with Sloan v. United States, Civ. No. 06–483 (D.D.C.2006). Id. Put succinctly, the plaintiffs allege that Notice 2006–50 is substantively flawed because it undercompensates many taxpayers for the actual excise taxes paid, and that it is procedurally flawed because the IRS did not comply with the APA's notice-and-comment procedures. Id.

This court previously dismissed the case after concluding that the plaintiffs had failed to exhaust their administrative remedies for their refund claims and failed to state valid claims under federal law. Id. In so holding, the court determined that the Notice was an “internal policy” that did not adversely affect the plaintiffs' rights, and that therefore the agency action was unreviewable. Id. The plaintiffs appealed, and a divided Circuit panel reversed, holding that the Notice constituted a final agency action reviewable under the APA and that the court maintained proper jurisdiction. Id. at 722. The IRS petitioned for en banc review. Id. The Circuit “granted rehearing en banc only to determine whether [it had] the authority to hear the case.” Id. at 719.

The Circuit held that it had authority to hear the case. Id. at 736. As a threshold matter, the Circuit determined that the government had waived its sovereign immunity. Id. at 723. The Circuit further decided that other limitations to judicial review, namely, the Anti–Injunction Act and the Declaratory Judgment Act, did not apply to the plaintiffs' APA claims. Id. at 724–25. More specifically, the Circuit ruled that the plaintiffs were not required to exhaust their administrative remedies to pursue their claims because they were challenging the adequacy of the agency procedure itself. Id. at 726. Accordingly, the Circuit reversed this court's dismissal and remanded the case, instructing this court “to consider the merits of [the plaintiffs'] APA claim, in accordance with the opinion of [the Circuit].” Id. at 736.

Upon remand, the defendant filed a motion asking this court to decide the effect of the Circuit's mandate on the plaintiffs' remaining APA claims. See generally Def.'s Mot. The plaintiffs have filed a response, clarifying those areas in which they are in agreement and disagreement with the defendant. See generally Pls.' Response. With the defendant's motion now ripe for the court's consideration, the court turns to the parties' positions and the applicable legal standards.

III. ANALYSIS

A. Procedural APA Violation

The defendant asks that the court clarify “whether the [Circuit] has already decided [the] plaintiffs' procedural APA claim in [the plaintiffs'] favor,” noting that “[t]he mandate is unclear on this point.” Def.'s Mot. at 1, 6. If indeed “a procedural APA violation is now [the] law of the case,” the defendants conclude, “then the question is the proper remedy and its effect on further proceedings.” Id. at 7. The plaintiffs, for their part, assert that the “only reasonable interpretation” of the Circuit's decision is that the defendant violated the APA's notice-and-comment requirements. Pls.' Response at 5–6 (emphasis omitted). As such, the plaintiffs maintain that “the primary issue now before this [c]ourt is the determination of the appropriate remedy for this APA violation.” Id. at 6.

In its decision, the en banc Circuit panel explained that it had “no occasion to visit the merits of [the plaintiffs'] claims,” instead limiting its review “to determine whether [the courts] have authority to hear the case.” Cohen v. United States, 650 F.3d 717, 719 (D.C.Cir.2011). Indeed, the Circuit's mandate directs this court to now “consider the merits of [the plaintiffs'] APA claim.” Mandate (Dec. 9, 2011). Nevertheless, the parties urge the court to consider whether the Circuit, in deciding the jurisdictional issues, may have determined that the defendant indeed committed a procedural APA violation. The court thus turns to consider that decision, but first pauses to describe the legal standards guiding a court's determination that an APA procedural violation has occurred due to the absence of notice-and-comment rulemaking.

The APA's notice-and-comment requirements “serve the salutary purposes of ‘(1) ensuring that agency regulations are tested via exposure to diverse public comment, (2) ensuring fairness to affected parties, and (3) giving affected parties an opportunity to develop evidence in the record to support their objections to the rule and thereby enhance the quality of judicial review.’ ” AFL–CIO v. Chao, 496 F.Supp.2d 76, 91 (D.D.C.2007) (citing Int'l Union, United Mine Workers of Am. v. Mine Safety and Health Admin., 407 F.3d 1250, 1259 (D.C.Cir.2005)) (internal alterations omitted). If an agency issues a binding pronouncement, the agency “must observe the APA's legislative rulemaking procedures,” including notice-and-comment requirements. General Electric Co. v. Envt'l Prot. Agency, 290 F.3d 377, 382–383 (D.C.Cir.2002); cf. Cement Kiln Recycling Coalition v. Envt'l Prot. Agency, 493 F.3d 207 n. 14 (D.C.Cir.2007) (noting that an agency may be exempt from notice-and-comment requirements if the pronouncement qualifies as a mere “policy statement,” i.e., a non-binding discretionary agency pronouncement that does not impose any rights and obligations).

An agency may nevertheless be excused from notice-and-comment procedures for “good cause.” AFL–CIO v. Chao, 496 F.Supp.2d at 89 (“The APA puts the agency to a simple either/or choice: either notice-and-comment procedures or the good-cause exception.”). An agency invoking the “good cause” exception “must support [its claim] with something more than bald assertions that [it does] not believe comments would be useful.” Id.

In addition, the court must determine whether the agency's failure to engage in notice-and-comment rulemaking constitutes harmless error. Id. at 88 (“The D.C. Circuit has repeatedly conducted some form of harmless-error analysis where it has determined that an agency failed to...