Phone Tax Challenge Reinstated
Bonner, Paul, Journal of Accountancy
A panel of the U.S. Court of Appeals for the District of Columbia ruled that taxpayers could challenge under the Administrative Procedure Act (APA) the IRS' method of refunding long-distance telephone excise taxes.
The 2-1 decision in Neiland Cohen v. U.S. reversed and remanded a dismissal of the case by the District Court for the District of Columbia. The appellate court's opinion by Judge Janice Rogers Brown sharply criticized the IRS' position as "mean," demonstrating "chutzpah" and demanding "clairvoyance" of taxpayers. The case had been consolidated with two others.
The 3% excise tax on phone service under IRC [section] 4251 had been contested by a number of taxpayers with respect to toll calls. IRC [section] 4252(b) defines taxable service as including long-distance calls for which the charge varies with time and distance or is billed by a fiat fee for calls within a specified nonlocal area. However, taxpayers argued, because of changes in telecommunications, distance-related charges no longer applied in most cases. After several circuit courts had ruled against the IRS, the Service in Notice 2006-50 announced it would stop collecting the tax on charges based solely on transmission time and provided a procedure for refunds. Taxpayers could claim refunds on their 2006 income tax returns for either actual taxes paid from 2003 to 2006 or a safe harbor amount (for individual taxpayers, between $30 and $60, depending on the number of exemptions).
The district court ruled that Cohen had not met the requirements of section 7422, which generally bars any refund suit until an administrative claim has been filed. On appeal, Cohen argued that the refund scheme violated the APA, which is codified under Title 5 of the U.S. Code starting at section 500. It allows courts to set aside federal agency actions that are "arbitrary and capricious, an abuse of discretion or otherwise not in accordance with the law" (5 USC [section] 706(2)(A)). Notice 2006-50 could be reviewed under the APA because it was a final agency action resulting from IRS deliberations and altered the legal rights or obligations of the Service, tax collectors and taxpayers, the appellate court said. …