Cohen v. U.S.

578 F.3d 1

Neiland COHEN, Appellant v. UNITED STATES of America, Appellee.

No. 08-5088.

No. 08-5093.

No. 08-5174.

United States Court of Appeals, District of Columbia Circuit.

Argued May 1, 2009.

Decided August 7, 2009.

Appeals from the United States District Court for the District of Columbia (No. 1:07-cv-00051).

Michael A. Bowen and Robert J. Cynkar argued the cause for appellants. With them on the briefs were Jonathan W. Cuneo, Marc B. Dorfman, Henry D. Levine, Charles Tiefer, Mark C. Rifkin, Mark D. Griffin, and Randy J. Hart.

Ellen Page DelSole, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief were Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, Jeffrey A. Taylor, U.S. Attorney, and Teresa E. McLaughlin, Attorney. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.

Before: GARLAND, BROWN, and KAVANAUGH, Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

Dissenting opinion filed by Circuit Judge KAVANAUGH.

BROWN, Circuit Judge:

Comic-strip writer Bob Thaves famously quipped, "A fool and his money are soon parted. It takes creative tax laws for the rest." In this case it took the Internal Revenue Service's ("IRS" or "the Service") aggressive interpretation of the tax code to part millions of Americans with billions of dollars in excise tax collections. Even this remarkable feat did not end the IRS's creativity. When it finally conceded defeat on the legal front, the IRS got really inventive and developed a refund scheme under which almost half the funds remained unclaimed. Now the IRS seeks to avoid judicial review by insisting the notice it issued, acknowledging its error and announcing the refund process, is not a binding rule but only a general policy statement.

We conclude the notice bound the Service, tax collectors, and taxpayers. Accordingly, we reverse the district court's dismissal of Appellants' claims made under the Administrative Procedures Act ("APA"). We further determine Appellant Neiland Cohen filed his refund claim prematurely and, thus, affirm the district court's dismissal of his refund claim.

I

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. The Code taxes only communications charges that vary with distance and transmission time. Id. § 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 Corp. 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 IRS Not.2005-79 (Oct. 20, 2005) ("Notice 2005-79"); see also IRS 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 suit seeking refunds and several circuits, including this one, concluded time-only rate structures render calls nontaxable under the Code. Nat'l R.R. Passenger, 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 issued Notice 2005-79, which 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. It 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 these claims while related cases pended in federal courts of appeals. Id.

The IRS lost in every circuit that considered its application of § 4251. Five circuits held the tax inapplicable to long-distance calls charged without reference to the distance variable. Nat'l R.R. Passenger, 431 F.3d 374; Reese Bros., Inc. v. United States, 447 F.3d 229 (3d Cir.2006); Fortis, Inc. v. United States, 447 F.3d 190, 191 (2d Cir.2006); OfficeMax, Inc. v. United States, 428 F.3d 583 (6th Cir.2005); Am. Bankers Ins. Group, 408 F.3d at 1338. In response, on May 26, 2006, the IRS issued Notice 2006-50. See IRS Not.2006-50 (May 26, 2006) ("Notice 2006-50"). The notice announced the discontinuation of the excise tax for phone charges based solely on transmission time and the refund process for taxes erroneously collected between February 28, 2003 and August 1, 2006. Id.

Under Notice 2006-50, individual taxpayers had to request their refund or credit on their 2006 federal income tax returns. Id. This requirement extended to individuals who otherwise did not need to file income tax returns. Id. Taxpayers could either request a "safe harbor" amount, which required no documentation, or the actual amount of tax they paid, for which the IRS could demand documentation. Id. § 5(c).

Various lawsuits arose challenging the refund process. See In re Long-Distance Telephone Service Federal Excise Tax Refund Litigation, Docket No. 1798, 469 F.Supp.2d 1348 (J.P.M.L. Dec. 28, 2006) (Transfer Order). The Multidistrict Litigation ("MDL") Panel centralized and transferred three district court cases into an MDL proceeding before the United States District Court for the District of Columbia. Id., at 1349-50. The district court dismissed the cases after concluding Appellants failed to exhaust their administrative remedies for their refund claims and failed to state valid claims under federal law, including the APA, 5 U.S.C. § 702. The district court also ruled their claims for injunctive and declaratory relief were mooted by the IRS's decision to discontinue the tax on time-based phone charges. In re Long-Distance Tel. Serv. Federal Excise Tax Refund Litigation, 539 F.Supp.2d 281, 287 (D.D.C.2008). Appellants appeal the district court's dismissal of their APA claims. Appellant Cohen appeals the district court's conclusion that he failed to meet jurisdictional exhaustion requirements.

II

We review de novo the district court's dismissal of Appellants' APA claims for failure to state a claim upon which relief can be granted, Kassem v. Wash. Hosp. Ctr., 513 F.3d 251, 253 (D.C.Cir. 2008), as well as the dismissal of Appellant Cohen's refund claim for lack of subject-matter jurisdiction, Nat'l Taxpayers Union, Inc. v. United States, 68 F.3d 1428, 1432 (D.C.Cir.1995). Applying this standard, we reverse the dismissal of Appellants' APA claims, but affirm the dismissal of Cohen's refund claim.

A

Before delving into the propriety of the district court's dismissal, we pause to consider jurisdiction. The IRS raises two challenges to our jurisdiction: (1) the Anti-Injunction Act ("AIA"), which provides "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed," 26 U.S.C. § 7421(a), and (2) the Declaratory Judgment Act ("DJA"), which allows for declaratory relief but specifically excludes federal taxes from its reach, 28 U.S.C. § 2201(a). As these acts are coterminous, Investment Annuity v. Blumenthal, 609 F.2d 1, 4 (D.C.Cir.1979), we address them jointly. They do not apply.

At the district court, Appellants made various claims for injunctive and declaratory relief as well as claims under the APA. In re Long-Distance Tel. Serv., 539 F.Supp.2d at 287-99. On appeal, however, Appellants only press the APA claims asking us to strike down the IRS's refund regime as unlawful or, alternatively, to remand the issue to the district court. Appellants do not seek to restrain the assessment or collection of taxes and the requested relief, if granted, could not result in impermissible restraints. As such, on the unusual facts of this case, neither the AIA nor the DJA apply.¹

We also step back to contemplate the basis of our jurisdiction. After all, this is not your typical tax case. In a run-of-the-mill case, taxpayers litigate who has the right to disputed funds, along with incidental quarrels over the IRS's procedures, in the context of a suit for refund. This pattern exists for good reason: usually the taxpayer's goal is to get his money back and the only way to do this is to bring a refund claim. Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 7, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962) (the tax code "require[s] that the legal right to the disputed sums be determined in a suit for refund"). To accomplish this, taxpayers must strictly comply with the refund procedures set forth in the tax code, including the obligation under § 7422 to file an administrative claim with the IRS before filing suit. United States v. Clintwood Elkhorn Mining Co., ___ U.S. ___, ___, 128 S.Ct. 1511, 1515, 170 L.Ed.2d 392 (2008).

But this case is different: the fight is over process, not disputed funds. The IRS has conceded it did not have the right to collect the excise tax for phone charges based solely on transmission time in the first place and, with the exception of Appellant Cohen's separate claim addressed infra, Appellants no longer seek a refund in this suit. See Appellants' Reply Br. 5. They seek to challenge the procedural obstacles the IRS inserted between individual taxpayers and their right to file suit to recover unlawfully collected taxes. They, therefore, request that we review and overturn Notice 2006-50. This presents ...