Friday, August 7, 2009
In a blistering 2-1 opinion, the D.C. Circuit today reinstated a challenge to the IRS's procedures for issuing billions of dollars of refunds of the long distance telephone excise tax. Cohen v. Commissioner, No. 08-5088 (D.C. Cir. Aug. 7, 2009). Here is the opening of the majority's opinion:
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”).
The majority first explains how it has jurisdiction to hear the case (citations omitted):
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. 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.
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. 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 us with a wrinkle. The tax code waives sovereign immunity and grants district courts original jurisdiction only for civil actions for the recovery of taxes. 28 U.S.C. § 1346(a)(1). So, under what authority do we review Appellants’ APA claims and is that review permissible in light of the tax code’s vigorous limits on judicial intervention?
Federal jurisdiction to hear this administrative challenge lies not in the tax code, but in our federal question jurisdiction. The APA waives the government’s sovereign immunity, and thus permits the exercise of jurisdiction, in actions seeking non-monetary relief with respect to agency action. 5 U.S.C. § 702. This waiver applies as long as another statute does not limit judicial review or forbid the type of relief sought.
The tax code deprives federal courts of jurisdiction over suits “for the recoveryof any internal revenue tax alleged to have been erroneously or illegally assessed or collected, . . . or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed.” 26 U.S.C. § 7422(a) (emphasis added). As a result, no suit for refund can be brought under the APA—taxpayers looking to recoup funds must proceed under the refund scheme set forth in the tax code. Rather, only in the anomalous case where the wrongful assessment is not disputed and litigants do not seek a refund is a standalone claim under the APA viable. This is that case.
Of course, Appellants hope to parlay a victory in this suit into a successful suit for recovery. But these aspirations are too remote to transform these APA claims into a suit for refund. Even if Notice 2006-50 were struck down as unlawful, Appellants still may achieve only a pyrrhic victory. Moreover, Appellants’ desire to pursue refunds later, depending on the outcome of this litigation, is perfectly acceptable and has no bearing on the nature of their claims or the remedy to which they now may be entitled. Most taxpayers seek “proper tax treatment” in addition to invalidation of a flawed regulation. Kristin E. Hickman, A Problem of Remedy: Responding to Treasury’s (Lack of) Compliance with Administrative Procedure Act Rulemaking Requirements, 76 Geo. Wash. L. REV. 1153, 1185 (2008). The possibility that this suit may help create a later opportunity for Appellants to pursue a refund in compliance with the dictates of the tax code does not affect our jurisdiction.
The majority next concludes that Notice 2006-50 did not comply with the APA (citations omitted):
With our jurisdiction established, we consider Appellants’ APA claims. The APA affords causes of action to parties adversely affected by agency action. 5 U.S.C. §§ 702, 704. Section 704, however, limits judicial review to “[a]gency action made reviewable by statute and final agency action for which there is no other adequate remedy in a court.” 5 U.S.C. § 704. A substantive rule constitutes a binding final agency action and is reviewable. Id. § 704. Courts review substantive rules to ensure, inter alia, the agency acted in a reasonable manner within its statutory authority and promulgated the rules in accordance with the notice-and-comment requirements of the APA. Id. § 706. A general statement of policy, on the other hand, is exempt from notice-and-comment rulemaking requirements and is not a “final agency action,” rendering it unreviewable. Id. §§ 553, 704.
Appellants assert Notice 2006-50 constitutes final agency action that “arbitrarily, unreasonably, and unlawfully limits restitution of the funds unlawfully exacted.” To determine whether Notice 2006-50 is a binding standard, and thus a final and reviewable agency action, we consider whether it (1) marked the “consummation” of the IRS’s decisionmaking process and (2) either affects legal “rights or obligations” or results in “legal consequences.” We conclude Notice 2006-50 operates as a substantive rule that binds the IRS, excise tax collectors, and taxpayers. ...
The IRS urges Notice 2006-50 amounts to no more than a policy statement explaining how the Service will exercise its statutory discretion with respect to refunds of nontaxable communications excise taxes. ...
Due to the inverted posture of this refund case, the IRS’s policy-based arguments fail. We agree the tax code favors IRS flexibility in the administration of refunds. The IRS’s “exceedingly strong interest in financial stability” is at its peak when the Service’s right to retain the funds is in dispute, but this interest ebbs considerably when, as here, the IRS has conceded it had no right to collect the funds in the first place. When the IRS made that concession, via Notice 2006-50, it did not merely forecast how it intended to exercise its statutory discretion to address a refund claim. Rather, it promulgated a reviewable, substantive rule dictating the future administration of this type of claim. In doing so, the Service forfeited the discretion it retained prior to issuing the notice. Its asymmetry notwithstanding, Notice 2006-50 binds the IRS. ...
[T]he IRS still has the chutzpah to chide taxpayers for failing to intuit that neither the agency’s express instructions nor the warning on its forms should be taken seriously. According to the IRS, taxpayers should have realized all the options the Service said were closed to them—using forms that proclaim their inapplicability in bold letter or filing informal claims that could not be perfected—were nonetheless sufficient to fulfill their administrative refund obligations and to serve as a prerequisite to judicial review. Not hardly. Taxpayers bear a heavy burden when pursuing refund claims, but we have yet to demand clairvoyance. ...
In sum, the IRS unlawfully expropriated billions of dollars from taxpayers, conceded the illegitimacy of its actions, and developed a mandatory process as the sole avenue by which the agency would consider refunding its ill-gotten gains. It cannot avoid judicial review of that process by simply designating it a policy statement. Notice 2006-50 constituted a final agency action that aggrieved taxpayers by hindering their access to court. Accordingly, we reverse the district court and remand Appellants’ APA claims for further consideration. ...
The majority opinion then takes a swipe at the dissent's reliance on a law review article:
The only other support the dissent offers is a law review article. With all due respect to the Academy, we take the law as we find it in the opinions of this circuit. Because the AIA does not apply, the DJA’s tax exception likewise does not apply. ...
The majority concludes (citations omitted):
We agree that the thrust of legislation and jurisprudence in this area aims at protecting the IRS from draining litigation. That much is evident from the AIA, the DJA, and Congress’s decision to relieve the IRS from some, but not all, of the requirements in the APA, see 26 U.S.C. § 7852(e). Once the limits of the protections Congress provided have been surpassed, however, the IRS is subject to the same legal requirements as other administrative agencies. And rightfully so. No agency operates beyond the reach of the law. In this odd case, neither the AIA, the DJA, the tax code’s statutory exhaustion provision, nor the ripeness doctrine apply to protect the IRS from scrutiny.
The dissent responds (citations omitted):
So, too, the leading academic on this issue has explained that the precedents applying § 7421(a), § 7422(a), § 2201(a), and the ripeness doctrine stand “almost unyieldingly against pre-enforcement challenges to Treasury’s regulations promulgated in violation of APA procedural requirements.” Kristin E. Hickman, A Problem of Remedy: Responding to Treasury’s (Lack of) Compliance with the Administrative Procedure Act Rulemaking Requirements, 76 Geo. Wash. L. Rev. 1153, 1200 (2008). It is true that Professor Hickman argues for changing the state of the law, but she acknowledges frankly that it “is perhaps quixotic to suggest that the courts rethink doctrine firmly rooted in forty years of jurisprudence.”
In charting a new course in this case, the majority opinion refers to the IRS’s position in the events surrounding this case as “adamant,” “aggressive,” “creative,” “inventive,” “remarkable,” “mean,” and exhibiting “chutzpah” – and the majority opinion then proclaims that “[n]o agency operates beyond the reach of the law.” Maj. Op. at 23. I of course agree wholeheartedly with the sentiment that the IRS must comply with the law. But that sentiment, as I see it, is a red herring in this case. The question here concerns only the timing of judicial review, not the availability of judicial review.
With respect to the actual issue presented – namely, the timing of judicial review – it is telling that the majority opinion and plaintiffs cite no decision that has entertained an APA challenge to an IRS rule relating to taxes outside the context of a refund suit. The lack of support in the Federal Reporters for entertaining a free-standing, pre-enforcement APA challenge to a tax regulation counsels judicial caution and restraint – and helps demonstrate, in my judgment, the novelty and error of the majority opinion’s approach.
The majority opinion claims that the lack of case law permitting challenges to tax regulations except in refund suits actually is of no moment because, it says, there are not many opinions expressly rejectingthis precise kind of free-standing APA challenge. But we could line Constitution Avenue from this Courthouse to the IRS Building with judicial decisions that apply § 2201(a), the Anti-Injunction Act, the statutory exhaustion principle, and the ripeness doctrine and hold that challenges to tax laws and regulations must occur in refund suits. Those many decisions, in my judgment, establish a principle of judicial restraint that plainly covers this suit.
In sum, plaintiffs’ APA claims are barred from review at this time by 28 U.S.C. § 2201(a), or in the alternative, by the ripeness doctrine. I respectfully dissent from the majority opinion’s contrary conclusion.
Press and blogosphere coverage:
- Bloomberg: Court Revives Suit Demanding IRS Phone Tax Refunds
- Suits & Sentences: Spanking the IRS
Prior TaxProf Blog coverage:
- Can You Hear Me Now? IRS to Refund $15 Billion of Telephone Taxes to Consumers (May 25, 2006)
- IRS Announces Telephone Tax Refund Formula for Businesses & Nonprofits (Nov. 17, 2006)
- IRS Issues Rules for Telephone Excise Tax Refunds on 2006 Returns (Dec. 29, 2006)
- IRS Checking Inflated Telephone Excise Tax Refunds (Jan. 26, 2007)
- GAO Releases Report on Telephone Excise Tax Refund Requests (Apr. 14, 2007)
- District Court Dismisses Challenge to Refund of Telephone Excise Tax (Mar. 26, 2008)
- The 2006 Telephone Excise Tax Refund (Feb. 15, 2009)