Class action lawsuit filed seeking refunds of communications excise tax.
Scope of the Class Action
The class action covers all individuals and entities in the United States that purchased telecommunications services at any time within any period of limitations that may be determined to apply. The subject matter of the class action is the federal excise tax imposed on communications services by section 4251 (the "Communications Excise Tax"). That provision, through definitions contained in section 4252, imposes the Communications Excise Tax on a variety of services. One of those services is the so-called toll telephone service (commonly referred to as long-distance service), the charges for which are levied on a call-by-call basis and which vary based on, according to the statute, "distance and elapsed transmission time." I.R.C. [section] 4252(b)(1). Based on the plain language of section 4252(b)(1), a service charged on a call-by-call basis that varies only based on "elapsed transmission time" and does not vary based on "distance" (such as one of the very common "flat rate per-minute" plans, e.g., 7 cents a minute for each long distance call to any location in the United States) is not subject to the Communications Excise Tax. Although the application of the Communications Excise Tax to various other services may be appropriate under the relevant statutory provisions, the lawsuit alleges that the Internal Revenue Service has ignored the clear statutory requirements in section 4252(b)(1) in ruling that, despite the "literal" language of section 4252(b)(1), the Communications Excise Tax still should apply to tax call-by-call charges even if those charges do not vary based on distance. See Revenue Ruling 79-404, 1979-2 C.B. 382.
Three Circuit Courts of Appeals have rejected the IRS position and held that the Communications Excise Tax does not apply to tax toll telephone services the charges for which are levied on a call-by-call basis and do not vary based on distance. National Railroad Passenger Corp. v. United States, 2005 U.S. App. LEXIS 26884 (D.C. Cir. December 9, 2005); Office-Max, Inc. v. United States, 2005 U.S. App. LEXIS 23635 (6th Cir. November 2, 2005); American Bankers Insurance Group, Inc. v. United States, 408 F.3d 1328 (11th Cir. 2005), The Court of Federal Claims also has ruled in favor of taxpayers with respect to this issue.
America Online, Inc. v. United States, 64 Fed. C1. 571, 576 (Fed. C1. 2005). The government is appealing the AOL decision to the U.S. Court of Appeals for the Federal Circuit. (Argument in the case was held on April 4, 2006.) In all, at least 10 courts have applied the plain language of the statutory provisions at issue and have concluded that the language of the statute is unambiguous, the IRS position is untenable, and the tax does not apply to toll telephone services levied on a call-by-call basis when such charges do not vary based on distance.
Despite these repeated losses, the IRS continues to mandate that the telecommunications carriers collect the Communications Excise Tax from taxpayers with respect to services the per-call charges for which do not vary based on distance (the telecommunications carriers are collection agents for the IRS with respect to the tax). See Notice 2005-79, 2005-46 I.R.B. 952. Moreover, the IRS is holding substantially all claims for refund of the Communications Excise Tax relating to such services in suspense, precluding any consideration of the claims by the IRS Appeals Division or any other administrative resolution of such claims. In light of the continued IRS refusal to refund taxpayer's overpayments, the class action seeks relief on behalf of all similarly situated taxpayers.
In addition to the Radioshack class action, two other class actions have been filed that implicate the Communications Excise Tax (Rosenberg v. United States, Docket No. 05-1272T and Krasney v. United States, Docket No. 06-105). The government has filed a motion to dismiss the Rosenberg case on account of jurisdictional defects, and at a March 17 conference, it indicated that it will do the same with respect to the Krasney action if that latter action is not withdrawn. The Rosenberg and Krasney actions raise constitutional, due process, and injunctive or declarative claims that are problematic given longstanding jurisprudence limiting causes of action with respect to federal taxes to claims for refund of those taxes. It is also unclear from the face of the complaint in each of those actions the scope of the telecommunications services that allegedly should not be subject to the Communications Excise Tax, and thus whether such other actions will be able to proceed expeditiously in reliance on existing case law.
Participating in the Class Action
If the Radioshack class is certified by the Court of Federal Claims, depending on how the class is certified, taxpayers either (i) will be automatically included in the class action, or (ii) will have the option of affirmatively electing to be included in the class action. The motion for class certification seeks to certify the class in a manner that will expedite issuance of a judgment relating to taxpayers with valid and fully supported refund claims. This approach, if approved by the court, would allow a substantial number of taxpayers to reduce their outstanding refund claims to cash sooner rather than later.
In order to have the best chance of recovering an overpayment of Communications Excise Tax, each taxpayer should consider filing refund claims for overpaid Communications Excise Tax for all relevant periods as soon as possible. It can be argued that it is not technically necessary to file refund claims given the filing of the class action complaint and the intransigence of the IRS with respect to such claims. Given the uncertainties attendant to this approach, however, refund claims should be filed to best protect each taxpayer's interests.
The Radioshack complaint raises a question about the proper period of limitations during which refund claims may be filed. The IRS appears to have agreed that this period is at least three years from the date on which the telecommunications carrier was required to file its return and remit the tax collected from the taxpayer (typically one month after the final month in each calendar quarter). See generally I.R.C. [section] 6511(a). Because the taxpayer does not file a return with respect to the Communications Excise Tax, however, the literal language of section 6511 does not apply. Accordingly, it appears that there is no period of limitations on the filing of such refund claims. See generally Wachovia Bank N.A. v. United States, Docket No. 03-790 (M.D. Fla. 2005). The IRS also may argue that the period of limitations is six years. See generally 28 U.S.C. [section] 2501. To best protect its interests, any taxpayer that has not already filed refund claims for prior periods should file refund claims at least for the quarterly periods within the prior three years, and may wish to file refund claims for the prior six years (to take advantage of any six-year period of limitations that may apply).
Significantly, the class action does not cover situations in which a carrier levies a periodic charge (as opposed to a call-by-call charge) in exchange for a specific number of (or unlimited) minutes or calls (such as the now common billing method for cellular telephone service of, for example, $49.95 for 500 minutes) or situations in which the taxpayer pays one charge (periodic or otherwise) for a combination of long distance and local service (common in cellular telephone and VoIP (voice over Internet protocol) pricing structures). Any taxpayer that paid this type of charge may have a valid claim, but such a claim should be handled separately and not as part of the class action.
The highest levels of the IRS and the Treasury Department are apparently reviewing the Communications Excise Tax issue generally and the Radioshack class action in particular. Secretary of the Treasury John Snow recently suggested that the Government may be prepared to concede the issue, at least on a going-forward basis, if the Government's loss in OfficeMax is sustained. On March 30, 2006, the Sixth Circuit rejected the government's petition for an en banc review of OfficeMax, but the government nonetheless advanced its position in an argument before the Federal Circuit in AOL on April 4. Of course, Secretary Snow did not address the timing for payment of billions of dollars of excise tax refunds due to millions of taxpayers for prior periods. The Radioshack class action should facilitate the timely payment of such refunds. Even if the class action does not result in refunds for all affected taxpayers in America, the class action will be a significant success if it does nothing other than to help force the IRS to rethink its position and sooner rather than later cease the erroneous application of the tax on a going-forward basis.
DUANE WEBBER is a partner and GEORGE M. CLARK, III is an associate in the Washington, D.C., office of Baker & McKenzie. They are counsel for Radioshack Corporation.
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|Author:||Clark, George M.|
|Date:||Mar 1, 2006|
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