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

August 10, 2007


The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge

MDL Docket No. 1798




When the taxman takes too much, how must he disgorge his unlawful gains? This is the question confronting the court in the plaintiff's amended complaint bringing an Administrative Procedure Act ("APA") claim challenging the IRS's refund mechanism for a now-defunct levy of telephone excise taxes. The defendant seeks dismissal of the APA claim on the grounds that (1) the plaintiff lacks standing, (2) the IRS's action is committed to agency discretion, (3) the IRS enjoys sovereign immunity and (4) the IRS has taken no final action for which there is no other adequate remedy. Because none of these arguments withstands inspection, the court denies the defendant's motion to dismiss the claim, permitting further review to proceed on the merits.


A. Factual History

For nearly forty years, § 4251 of the Internal Revenue Code empowered the IRS to collect a three-percent excise tax on long-distance telephone calls. Nat'l R.R. Passenger Corp. v. United States, 431 F.3d 374, 374-75 (D.C. Cir. 2005). Two years ago, in a span of decisions separated by not more than twelve months, five federal appeals courts unanimously declared the IRS's reliance on § 4251 to be unlawful. Reese Bros., Inc. v. United States, 447 F.3d 229, 234 (3d Cir. 2006); Fortis, Inc. v. United States, 447 F.3d 190, 190 (2d Cir. 2006); Nat'l R.R. Passenger Corp. v. United States, 431 F.3d 374, 379 (D.C. Cir. 2005); OfficeMax, Inc. v. United States, 428 F.3d 583, 600 (6th Cir. 2005); Am. Bankers Ins. Group, Inc. v. United States, 408 F.3d 1328, 1338 (11th Cir. 2005).

The IRS heeded this juridical clarion and, on May 25, 2006, announced that it was discontinuing collection of the tax effective July 31, 2006. I.R.S. Not. 2006-50, 2006-25 I.R.B. 1141 § 4(c) (May 26, 2006) ("Notice procedure"). The Notice also announced the implementation of a refund procedure for taxes paid between February 28, 2003 and August 1, 2006, by which taxpayers would file claims on their federal income tax returns, requesting either a full refund (provided they retained substantiating records) or a "safe harbor" amount (ranging between thirty and sixty dollars). Def.'s Mot. to Dismiss Pl.'s APA Claim, ("Def.'s Mot.") at 2-3. In addition to the above, a taxpayer seeking a refund would have to withdraw any pending refund request from a telecommunications provider (the collector of the tax) or, if he were seeking a safe-harbor amount refund, withdraw any pending refund request from the IRS. Def.'s Reply at 2.

B. Procedural History

The plaintiff, Neiland Cohen, is a resident of Wisconsin*fn1 who (having allegedly purchased long-distance telephone services while the tax remained effective and submitted an administrative refund claim to the IRS) filed a suit on his own behalf and that of similarly situated taxpayers on November 29, 2005 for an injunction against enforcement of the excise tax. Compl. for Permanent Inj. and Req. for Class Certification ¶¶ 5, 24. After the IRS allegedly denied*fn2 his administrative request for a refund, the plaintiff filed his first amended complaint adding a monetary claim for a refund on February 6, 2006. Am. Compl. for Perm. Inj. Relief and Damages, and Req. for Class Certification ¶¶ 16-19. The IRS's acquiescence on May 25, 2006 to the judgment of the appellate courts mooted the plaintiff's request for injunctive relief, spurring him to again amend his complaint to add a claim for judicial review of the IRS's refund mechanism under the Administrative Procedure Act. Second Am. Compl. for Inj., Decl. J., and Monetary Relief, and Req. for Class Certification ("Am. Compl.") ¶¶ 26-29; 5 U.S.C. § 702. At this time, the plaintiff also updated his refund request to include the period from July 1, 2002 through July 31, 2006 (the last day the tax was collected), reflecting a total refund claim of $54.84. Am. Compl. ¶¶ 22-25.

In his APA claim, the plaintiff alleges that the refund mechanism constitutes final agency action that "arbitrarily, unreasonably, and unlawfully limits restitution of the funds unlawfully exacted" in that it: (a) limits restitution to funds exacted after February 28, 2003 rather than July 1, 2002; (b) requires the submission of requests on tax returns; (c) provides for "safe harbor" amounts that "fall materially below the likely entitlement of most potential claimants" and "conditions claims for larger amounts upon ability to produce documentation that phone-users could not be expected to retain"; (d) conditions use of the refund mechanism on the withdrawal of a prior refund request; and (e) "arbitrarily and unreasonably disregards approaches that would increase the degree of reparation achieved without creating any risk of global overpayment." Am. Compl. ¶¶ 26-28. The plaintiff asserts that "these and other deficiencies . . . will improperly interfere with judicial consideration of appropriate class remedies and limit the restitution effected by the government to a minor fraction of the total amount unlawfully exacted." Id. ¶ 29.

While the plaintiff's underlying claim for a full refund from the defendant of "not less than $54.84" and his request for class certification remain outstanding, id. ¶¶ 22-25, the instant motion does not encompass them. The instant motion seeks dismissal of only the APA claim, contending that the court lacks subject-matter jurisdiction over it because the plaintiff lacks standing, the IRS's action is committed to agency discretion and the IRS enjoys sovereign immunity. Def.'s Mot. at 5. The defendant also maintains that the plaintiff has failed to state a claim, arguing that the IRS has not taken any final action for which there is no other adequate remedy at law.*fn3 Id. at 15. It is to these arguments that the court now turns.


A. Legal Standard for a Motion to Dismiss Pursuant to Rule 12(b)(1)

Federal courts are courts of limited jurisdiction and the law presumes that "a cause lies outside this limited jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994); St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288-89 (1938); see also Gen. Motors Corp. v. Envtl. Prot. Agency, 363 F.3d 442, 448 (D.C. Cir. 2004) (noting that "[a]s a court of limited jurisdiction, we begin, and end, with an examination of our jurisdiction").

Because "subject-matter jurisdiction is an 'Art. III as well as a statutory requirement[,] no action of the parties can confer subject-matter jurisdiction upon a federal court.'" Akinseye v. District of Columbia, 339 F.3d 970, 971 (D.C. Cir. 2003) (quoting Ins. Corp. of Ir., Ltd. v. Compagnie des Bauxite de Guinea, 456 U.S. 694, 702 (1982)). On a motion to dismiss for lack of subject-matter jurisdiction pursuant to Rule 12(b)(1), the plaintiff bears the burden of establishing by a preponderance of the evidence that the court has subject-matter jurisdiction. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). The court may dismiss a complaint for lack of subject-matter jurisdiction only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Empagran S.A. v. F. Hoffman-Laroche, Ltd., 315 F.3d 338, 343 (D.C. Cir. 2003) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).

As subject-matter jurisdiction focuses on the court's power to hear the claim, however, the court must give the plaintiff's factual allegations closer scrutiny when resolving a Rule 12(b)(1) motion than would be required for a Rule 12(b)(6) motion for failure to state a claim. Macharia v. United States, 334 F.3d 61, 64, 69 (D.C. Cir. 2003); Grand Lodge of Fraternal Order of Police v. Ashcroft, 185 F. Supp. 2d 9, 13 (D.D.C. 2001). Thus, the court is not limited to the allegations contained in the complaint. Hohri v. United States, 782 F.2d 227, 241 (D.C. Cir. 1986), vacated on other grounds, 482 U.S. 64 (1987). When necessary, the court may consider the complaint supplemented by undisputed facts evidenced in the record, or the complaint supplemented by undisputed facts plus the court's resolution of disputed facts. Herbert v. Nat'l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992).

The level of scrutiny with which the Court examines the allegations in the complaint that support a finding of jurisdiction, however, depends upon whether the motion to dismiss asserts a facial or factual challenge to the court's jurisdiction. I.T. Consultants v. Pakistan, 351 F.3d 1184, 1188 (D.C. Cir. 2003). Facial challenges, such as motions to dismiss for lack of standing at the pleading stage, "attack[ ] the factual allegations of the complaint that are contained on the face of the complaint." Al-Owhali v. Ashcroft, 279 F. Supp. 2d 13, 20 (D.D.C. 2003) (internal quotation marks and citation omitted). "If a defendant mounts a 'facial' challenge to the legal sufficiency of the plaintiff's jurisdictional allegations, the court must accept as true the allegations in the complaint and consider the factual allegations of the complaint in the light most favorable to the non-moving party." Erby v. United States, 424 F. Supp. 2d 180, 181 (D.D.C. 2006); see also I.T. Consultants, 351 F.3d at 1188. The court may look beyond the allegations contained in the complaint to decide a facial challenge, "as long as it still accepts the factual allegations in the complaint as true." Jerome Stevens Pharm., Inc. v. Food & Drug Admin., 402 F.3d 1249, 1253-54 (D.C. Cir. 2005). Here, because the motion to dismiss does not dispute the underlying facts of the complaint, the defendant poses a facial challenge.

C. The Procedure for Challenging an Unlawful Federal Tax

Before treading into this jurisdictional maze, the court pauses to review the established legal infrastructure for obtaining a tax refund. At the outset, a taxpayer challenging a tax must first file a refund claim with the IRS. See I.R.C. § 7422(a) (providing that "[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax . . . until a claim for refund . . . has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof"). The Secretary by regulation requires that claims for refund:

set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. The statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury. A claim which does not comply with this ...

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