The United States Court of Appeals for the District of Columbia recently permitted the Internal Revenue Service (IRS) to retain several billion dollars in “ill-gotten gains” in a highly technical opinion of In Re: Long-Distance Telephone Service Federal Excise Tax Refund Litigation – MDL 1798. The IRS continued to levy an excise tax without authorization, and then violated the Administrative Procedure Act (APA) when it proposed a refund mechanism. After being called to task by the district court decision vacating and remanding the improperly promulgated “notice” without public comment, the IRS informed the court of appeals, through the Department of Justice (DOJ), that it was “not planning” to engage in future rulemaking on the subject. The IRS arrogance (and DOJ’s acquiescence or even collusion) will remain unremedied because the courts – although clearly dissatisfied – are limited in the remedies that they may prescribe, and affirmatively requiring rulemaking is beyond that pale.
Background: For many years, Congress imposed an excise tax on “amounts paid for … toll telephone service” that “varies in amount with the distance and elapsed transmission time of each individual communication.” Technological changes over the past generation completely altered the pricing structure of telephone service, first eliminating the distance metric, and more recently all but eliminating the time metric, The IRS, however, continued to collect the tax until five separate courts of appeals ruled against it – collection of the tax was not lawful.
The IRS then published promulgated, without advance notice and an opportunity for public comment, Notice 2006-50, 2006-1 C.B. 1141 (May 26, 2006),
- citing its judicial losses,
- declaring that it would no longer tax telephone service priced without regard to distance, and
- establishing a procedure to refund illegally collected excise taxes under which taxpayers could request a credit or refund on their 2006 Federal income tax returns of either (a) the amount of taxes actually overpaid or (b) a no documentation safe harbor amount.
After much maneuvering, the United States District Court for the District of Columbia declared that the IRS violated the APA by promulgating Notice 2006-50 without notice and an opportunity for public comment, prospectively vacated the Notice, and remanded to the IRS, but did not set a timetable for any further action by the IRS because no “law unequivocally requires such action.”
Jurisdiction on Appeal: Plaintiffs appealed, not from the vacatur and remand, but from what the district court did not do – set an affirmative date for the IRS to act and other here-non-germane issues. DOJ, for the IRS, argued that the court of appeals lacked jurisdiction because district court orders remanding to agencies are not final appealable decisions.
The general (asymmetrical) rule is that a remand allows the agency to correct its mistakes and plaintiffs may not appeal – this prevents duplicative appeals from both the district court’s remand order and an agency’s later final action. The government, on the other hand, may appeal remand orders because that appeal may be the only opportunity to appeal the district court’s decision.
The IRS’s arrogance, however, creates a different situation in this instance:
The [IRS] has not taken any reviewable action in the two years since the district court’s remand order. Indeed the [IRS] has no reason to act. The three-year statute of limitations for filing refund claims, …, has likely expired for most potential claimants and there is no need to streamline the refund process for hundreds of millions of taxpayers as there was when Notice 2006-50 issued eight years ago. We find it particularly important that at oral argument government counsel conceded that the [IRS] is “not planning” to engage in future rulemaking on the subject. …. In these unusual circumstances, treating the district court’s remand order as unappealable would “effectively preclude” plaintiffs from ever challenging the district court’s decisions.
Although not “final,” the court (distressed as it was) found that the substance of the appeal would not require it to reach an otherwise unaddressed question – that the law was substantively clear. The panel further noted that the United States Supreme Court (SCOTUS) has endorsed a “practical” approach to finality, particularly in the “twilight zone” where “it is impossible to devise a formula to resolve all marginal cases.” The court, therefore, found that is possessed jurisdiction to hear the appeal.
APA Remedies: The substance of the appeal lay in the remedies applied by the district court – and the lack of an affirmative date for the IRS to act. Plaintiffs argued that the district court erred in vacating the IRS Notice and remanding it to the IRS without specifically instructing the IRS to promulgate a new refund procedure. This asked too much, as the D.C. Circuit panel reiterated the limited APA remedy that when a rule is promulgated without notice and comment, the court must “hold unlawful and set aside” the agency action. Vacatur is the appropriate substantive order and remand is the appropriate procedural order. On the other hand, the APA permits a court to “compel agency action unlawfully withheld” when a “discrete action” is “legally required … about which an official had no discretion whatever.” Here, the court declined to mix two distinct remedies applicable to different agency actions (or inactions). The telephone excise tax cases, unfortunately, are about law and the limits of judicial review, not equity and doing what is right.
The dissent, by Judge Brown, is equally blunt about the posture of the case:
The [IRS] announced the demise of the refund notice and resolutely refused to take any other remedial action. Though there is no dispute about the unauthorized nature of the exaction, it intends to keep the unrefunded portions of its ill-gotten gains – a few billion dollars. Indeed, the [IRS} fares better than the Las Vegas casinos: even when they lose, they win. Since no law “unequivocally” requires the IRS to do the right thing, they have the discretion to do wrong. The taxpayers are out of luck. It was not always thus.
I join – without reservation – the court’s jurisdictional conclusion. As for the merits, however, I cannot say the same. The [IRS]’s recalcitrance is disconcerting, and I do not share my colleagues’ confidence that no law imposes a duty upon the [IRS] to create a workable refund scheme. ….
Judge Brown was unconvinced that mandatory action was lacking, suggesting that such a requirement need not arise only in statute, but may be inferred or imposed.
Having asked too much, plaintiffs, for now at least, receive nothing. Initiating rulemaking is a highly discretionary act – one the courts are loathe to impose. There are exceptions, but none apply here – yet. Plaintiffs might now petition the IRS under the APA to affirmatively promulgate regulations to disgorge their several billions in ill-gotten gain, notwithstanding the lapse of the time for refunds, and keep hope alive, or Congress might rise above itself to right a wrong.