In re Long-Distance Telephone Service Federal Excise Tax Refund Litigation

In re Long-Distance Telephone Service Federal Excise Tax Refund Litigation

Chimicles Schwartz Kriner & Donaldson-Smith LLP (CSK&D), along with its co-counsel, scored another major victory in a decision by the United States Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) that was released on July 1, 2011. CSK&D, which is a member of the court-appointed Plaintiffs’ Executive Committee, represents a proposed nationwide class of taxpayers who paid a telephone excise tax to their telephone providers, which then remitted it to the Internal Revenue Service (“I.R.S.”). The relevant tax law provides that the excise tax is only applicable to long distance toll telephone services that are charged based on both the distance and transmission time of the call. For many years, however, the I.R.S. improperly assessed the excise tax on telephone calls for which consumers were charged solely on the basis of the duration of the call (and without regard to distance).

On May 26, 2006 – several months after CSK&D filed a proposed class action lawsuit seeking refunds of the improperly collected tax – the I.R.S. conceded that it had improperly collected the excise tax on telephone communications that are billed based solely on the duration of the call. In connection with that concession, the I.R.S. issued a series of Notices pursuant to which taxpayers could make telephone excise tax refund claims on their income tax returns. Those taxpayers who did not otherwise file an income tax return were required to fill out and file a separate claim form in order to obtain their refund through the Notice procedures.

CSK&D challenged the legality of the refund process set forth in the Notices under the Administrative Procedures Act (“APA”). In particular, the taxpayers represented by C&T contend that the Notices were final agency action which were arbitrary, unlawful and inadequate, and which were issued without following the APA’s notice-and-comment requirements. Nearly half of the billions of dollars improperly collected by the I.R.S. still have not been refunded under the Notice program. The district court dismissed this APA challenge, but this decision was reversed on appeal by the D.C. Circuit in a 2-1 opinion that was issued on August 7, 2009. The D.C. Circuit subsequently granted the government’s request to have the case reheard en banc, and it was argued before the entire panel on September 29, 2010.

On July 1, 2011, the D.C. Circuit en banc panel issued an opinion that, by a 6 to 3 margin, found in favor of the taxpayers represented by CSK&D. Among other things, the majority opinion described the procedures subject to the APA challenge as a “virtual obstacle course for taxpayers to get their money back,” labeled the IRS’s “litigation position” as “startling,” and found that the taxpayers had no other adequate legal remedy. The D.C. Circuit rejected all of the government’s technical jurisdictional arguments that the Notices were immune from judicial review, and remanded the case to the district court with instructions for it to consider the merits of the taxpayers’ APA claim.
The D.C. Circuit’s opinion can be viewed by clicking below.

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Attorneys for this case:

Nicholas E. Chimicles
Benjamin F. Johns