TLJ News from May 6-10, 2006

DOJ Asserts That It Lacks Security Clearance to Investigate Itself

5/10. Rep. Maurice Hinchey (D-NY) issued a release in which he stated that the Department of Justice's (DOJ) Office of Professional Responsibility (OPR) informed him that "it has closed its investigation of the Bush administration's warrantless domestic surveillance program because OPR was denied the security clearances needed to conduct a probe."

He added that he and three other House Democrats "wrote a letter to OPR Counsel H. Marshall Jarrett in January, requesting that he probe the agency's involvement with the creation of the secret NSA program."

Rep. Hinchey wrote that Jarrett wrote the following: "I am writing to inform you that we have been unable to make any meaningful progress in our investigation because OPR has been denied security clearances for access to information about the NSA program. Beginning in January 2006, this Office made a series of requests for the necessary clearances. On May 9, 2006, we were informed that our requests had been denied. Without these clearances, we cannot investigate this matter and therefore have closed our investigation."

Rep. Hinchey stated in his release that "It is outrageous that people within the Bush administration have blocked an investigation into the role that members of the Justice Department played in establishing and executing this secret domestic spy program".

Judge Luttig Resigns

5/10. Michael Luttig resigned his position as Judge of the U.S. Court of Appeals (4thCir), effective immediately. Boeing hired him to be its General Counsel. See, Boeing release.

He wrote in a resignation letter [PDF] to President Bush that "I could not have imagined that I would ever leave the court", and that "service as a federal judge is one of the very highest callings in life". He has long been considered a leading contender for appointment to the Supreme Court by any Republican President. He did not mention in his letter that Bush passed him over last year with his nominations of John Roberts, Harriet Miers, and Sam Alito.

The elder President Bush appointed Luttig to the Court in 1991. He was confirmed just after turning 37, making him the youngest U.S. Court of Appeals judge. Luttig was the Assistant Attorney General in charge of the Office of Legal Counsel (OLC) at the time of the Senate's consideration of the nomination of Clarence Thomas to be a Supreme Court Justice. The OLC was actively involved in that confirmation battle. Before that, he clerked for Judge Antonin Scalia when he sat on the U.S. Court of Appeals (DCCir), and for former Chief Justice Warren Burger.

Luttig has sat on many three judge panels that have decided technology related cases. However, he has rarely written opinions in technology related cases. One exception was his dissent from the July 28, 2004, opinion [20 pages in PDF] in Bryan v. BellSouth, a case regarding federal question jurisdiction in which the Appeals Court addressed the filed rate doctrine and universal service taxes. See also, story titled "4th Circuit Addresses Filed Rate Doctrine and Consumer Protection Statutes" in TLJ Daily E-Mail Alert No. 949, July 30, 2004.

His resignation opens a position on the 4th Circuit.

More People and Appointments

5/10. President Bush nominated Neil Gorsuch to be a Judge of the U.S. Court of Appeals (10thCir). See, White House release. Most recently, Gorsuch has been the Principal Deputy Associate Attorney General in the Office of the Associate Attorney at the Department of Justice (DOJ). He has also been a member of the DOJ's Intellectual Property Task Force. Gorsuch was previously a partner in the Washington DC law firm of Kellogg Huber. He represented SBC and Qwest in antitrust and securities class action cases. Before that, he clerked for Judge David Sentelle of the U.S. Court of Appeals (DCCir), and for Justices Byron White and Anthony Kennedy of the Supreme Court. Gorsuch is the son of David Gorsuch and the late Anne McGill Gorsuch Burford. Early in her career she was a regional Bell attorney, assistant District Attorney in Colorado, and Colorado state legislator. She was also Ronald Reagan's first Administrator of the Environmental Protection Agency (EPA).

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5/10. The White House press office stated that President Bush created an identity theft task force. See, White House release and statement by Bush. See also, notice in the Federal Register, May 15, 2006, Vol. 71, No. 93, at Pages 27945-27947.

5/10. The Department of Homeland Security (DHS) published a notice in the Federal Register that states that its Data Privacy and Integrity Advisory Committee will meet on Wednesday, June 7, 2006, in San Francisco, California. See, Federal Register, May 10, 2006, Vol. 71, No. 90, at Pages 27266-27267. The DHS Privacy Office also published an agenda [PDF] in its web site.

House Republicans Introduce Bill to Expand CIPA to Include Chat Rooms and Social Networking Sites

5/9. Rep. Michael Fitzpatrick (R-PA) and other House Republicans introduced HR 5319, the "Deleting Online Predators Act of 2006", or DOPA. This bill would censor use of the internet by expanding the requirements of the Children's Internet Protection Act (CIPA) to include chat rooms and commercial social networking web sites. See, full story.

IRS Loses Another Frivolous Appeal Regarding Telephone Excise Tax

5/9. The U.S. Court of Appeals (3rdCir) issued its opinion [23 pages in PDF] in Reese Brothers v. USA, a case regarding the 3% excise tax on phone service. The Court of Appeals affirmed the judgment of the District Court. The IRS has now lost on this same issue before five circuit courts. There is no split of authority.

The IRS has now lost in the 2nd, 3rd, 6th, 11th Circuits, and DC Circuits. In addition, the IRS has lost in the U.S. District Court (NDCal) and twice in the Court of Federal Claims. There are not yet any appellate opinions in either the 9th Circuit or the Federal Circuit. Nevertheless, the IRS continues to collect the tax that the courts have ruled that it cannot collect.

There is nothing new or novel about the Reese Brothers case. The Court of Appeals rejected arguments that other courts have also rejected. TLJ has published stories on these prior opinions.

The Court of Appeals wrote in the Reese Brothers case that "The question presented in this appeal is whether the federal communications excise tax set forth in 26 U.S.C. § 4251(a)(1) applies to long-distance telephone services that are priced based on a fixed per-minute, non-distance-sensitive rate. Based upon the plain language and structure of the statute, we conclude that it does not. The District Court granted summary judgment in favor of the taxpayer. We affirm."

It added that "we conclude that the federal communications excise tax does not apply to long-distance telephone services that are priced based on a fixed per-minute, non-distance-sensitive rate. The Government would have us extend the reach of the federal communications excise tax beyond its text. Following the Supreme Court’s analysis in Iselin, and that of our sister circuits in Fortis, OfficeMax, American Bankers, and Amtrak, we decline to do so."

American Bankers: 11th Circuit. The U.S. Court of Appeals (11thCir) issued its opinion [22 pages in PDF] in ABIG v. IRS on May 10, 2005. See also, story titled "IRS Loses Appeal Over 3% Excise Tax on Communications" in TLJ Daily E-Mail Alert No. 1,133, May 11, 2005. This case is American Bankers Ins. Group v. United States, U.S. Court of Appeals for the 11th Circuit, App. Ct. No. 04-10720, an appeal from the U.S. District Court for the Southern District of Florida, D.C. No. 03-21822 CV-PCH. Judge Dubina wrote the opinion of the Court of Appeals, in which Judge Anderson and Black joined. The Court of Appeals opinion is also reported at 408 F.3d 1328. The District Court opinion is also reported at 308 F. Supp. 2d 1360.

Office Max: 6th Circuit. The U.S. Court of Appeals (6thCir) issued its opinion [20 pages in PDF] in Office Max v. US on November 2, 2005. See also, story titled "IRS Loses Another Appeal Regarding 3% Excise Tax" in TLJ Daily E-Mail Alert No. 1,246, November 3, 2005. This case is Office Max, Inc. v. U.S.A., U.S. Court of Appeals for the 6th Circuit, App. Ct. No. 04-4009, an appeal from the U.S. District Court for the Northern District of Ohio, at Cleveland, D.C. No. 03-00961, Judge Patricia Gaughan presiding. The Court of Appeals opinion is reported at 428 F.3d 583.

Amtrak: DC Circuit. The U.S. Court of Appeals (DCCir) issued its opinion [11 pages in PDF] in Amtrak v. US on December 9, 2005. The National Railroad Passenger Corporation is better known as Amtrak. This case is National Railroad Passenger Corp. v. United States, U.S. Court of Appeals for the District of Columbia Circuit, App. Ct. No. 03cv00431, an appeal from the U.S. District Court for the District of Columbia. Judge Tatel wrote the opinion of the Court of Appeals, in which Judges Williams and Griffith joined. This case is reported at 431 F.3d 374.

Fortis: 2nd Circuit. The U.S. Court of Appeals (2ndCir) issued its opinion [PDF] in Fortis v. USA , on April 27, 2006. See also, story titled "2nd Circuit Rules Against IRS on Excise Tax on Phone Service" in TLJ Daily E-Mail Alert No. 1,361, May 1, 2006. This case is Fortis, Inc. v. United States of America, U.S. Court of Appeals for the 2nd Circuit, App. Ct. No. 05-2518-cv, an appeal from the U.S. District Court for the Southern District of New York, D.C. No. 03 Civ. 5137, Judge John Koeltl. The Court of Appeals issued a per curiam opinion of Straub, Sack and Trager.

Trial Court Opinions. The U.S. District Court (NDCal) issued its opinion in Hewlett-Packard Co. v. U.S. on August 5, 2005. It is reported at 2005 U.S. Dist. LEXIS 19972. The Court of Federal Claims issued its opinion [14 pages in PDF] in America Online, Inc. v. U.S., on March 30, 2005. This case is No. 03-2383-T, Judge Charles Lettow presiding. It is also reported at 64 Fed. Cl. 571. The Court of Federal Claims issued its opinion [19 pages in PDF] in Honeywell International, Inc. v. U.S. on February 16, 2005. This case is No. 03-1915 T, Judge George Miller presiding. It is also reported at 64 Fed. Cl. 188.

26 U.S.C. § 4251 provides for the 3% excise tax. 26 U.S.C. § 4252 provides the relevant definitions. To be taxable, a "toll telephone service" must include a "toll charge which varies in amount with the distance and elapsed transmission time".

The key word here is "and". The taxpayers in all of these cases assert that "and" means "and". The IRS asserts that "and" means "or".

The Court of Appeals in the Reese Brothers case titled a long section of its opinion "The Meaning of the Word ``And´´". The Court of Appeals held that the meaning of the word "and" is "unambiguous". It means "and".

The Court of Appeals wrote, "Reading the statute as a whole, we conclude that ``and´´ is used in its conjunctive sense in § 4252(b)(1). Accordingly, in order to be taxable under that provision, charges for long-distance telephone services must be based on both distance and elapsed transmission time."

The Court of Appeals added that "four other courts of appeals–the Second, Sixth, Eleventh, and District of Columbia circuits–have considered the meaning of § 4252(b)(1). In each case, the court has rejected the same arguments that the Government advances in this case. ... We agree with the decisions reached by our sister circuits and will join them in ruling in favor of the taxpayer."

The Court of Appeals in this case, as in earlier cases, also rejected all other arguments advanced by the IRS. In the present case, the Court of Appeals tossed in a few colorful words, such as "implausible" and "strains credulity".

Nevertheless, while the Courts have unanimously rejected the argument of the IRS, and the courts have the power to interpret the statutes of the Congress, the IRS continues to collect taxes that it is not authorized by law to collect.

Teresa McLaughlin, the attorney in the Department of Justice's (DOJ) Tax Division who argued the case for the IRS, declined to respond to any questions from TLJ regarding this opinion. A representative of the IRS Office of General Counsel also declined to comment. The IRS press office declined to comment.

A Treasury Department press office person told TLJ that there are "no real updates to give you" and that "they are working on the issue".

This case is Reese Brothers, Inc. v. USA, U.S. Court of Appeals for the 3rd Circuit, App. Ct. No. 05-2135, an appeal from the U.S. District Court for the Western District of Pennsylvania, D.C. No. 03-cv-00745, Judge Terrence McVerry. Judge Smith wrote the opinion of the Court of Appeals, in which Judges Rendell and Joseph Irenas joined.

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5/9. Federal Communications Commission (FCC) Commissioner Deborah Tate gave a video recorded speech [4 pages in PDF] to the Rural Wireless Association.

5/9. The Federal Communications Commission (FCC) released an item [37 pages in PDF] titled "Declaratory Ruling and Notice of Proposed Rulemaking" in its proceeding titled "In the Matter of Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities". This item declares that "a Video Relay Service (VRS) provider may not receive compensation from the Interstate TRS Fund (Fund) if it blocks calls to competing VRS providers". The FCC adopted this item at its meeting of May 3, 2006. It is FCC 06-57 in CG Docket No. 03-123.

7th Circuit Rules in Case Regarding Installation of Fiber Optic Cable in RR ROW

5/8. The U.S. Court of Appeals (7thCir) issued its opinion [PDF] in Peeler v. MCI, affirming the judgment of the District Court. Sallie Peeler filed a complaint in state court in Illinois against MCI regarding its installation of fiber optic cable along an abandoned railroad right of way in which Peeler claims an interest as the owner of an adjacent parcel. MCI removed the action to federal court.

She sought to enjoin the installation. MCI has already installed the cable. The Court of Appeals ruled that her request to enjoin the installation is now moot.

MCI also filed a bankruptcy petition. Peeler did not file a claim. MCI obtained a general discharge. The Court of Appeals held that this extinguished her state law claims. It wrote that "Claims based on the existence of the underground conduit, and the cable's use to transmit photons that carry voice and data traffic, have been discharged."

However, the Court of Appeals affirmed and remanded, holding that there is one item that remains open. MCI also installed a fiber box on the land in which Peeler asserts an interest. The Court of Appeals wrote that "This structure, which permits workers to access the cable should it need repair or replacement, occupies about 15 square feet of the surface. Any obligation to pay compensation on account of the box's existence has been discharged; but if MCI should use the box in the future to access the underground cable then the repair teams would re-enter Peeler’s land. MCI lacks Peeler’s consent to do this." The Court concluded that "Because the possibility of future entries to repair existing cable was not the basis of Peeler's motion for equitable relief in 2001, it does not provide any basis for disturbing the district court’s decision. But it does show that the case is not moot."

The Court of Appeals added that "Before the district court takes up whether Indiana law entitles Peeler to either an injunction against future entry or compensation for an easement, it must decide whether Peeler has the ownership interest she asserts. MCI denies that she has any legal interest in the land on which the fiber box sits. If Peeler does have a property interest -- and if MCI has not secured an easement through condemnation proceedings in state court, ... the district court must decide whether to certify the proceeding as a class action, as Peeler has proposed."

This case is Sallie Peeler v. MCI, Inc. and MCI WorldCom Network Services, Inc., App. Ct. No. 01-3019, an appeal from the U.S. District Court for the Southern District of Indiana, Indianapolis Division, D.C. No. IP 01-983-C-Y/G, Judge Richard Young presiding. The Court of Appeals issued a per curiam opinion in which Judges Easterbrook and Wood joined.

GAO Reports that Section 404 of Sarbanes Oxley Burdens Small Public Companies

5/8. The Government Accountability Office (GAO) released a report [93 pages in PDF] titled "Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies".

This report provides some support for the argument advanced by small public technology companies that Section 404 of the Sarbanes Oxley Act is imposing huge burdens on them, with little benefit to investors.

The report finds that smaller public companies face disproportionately higher costs of compliance than do larger companies. It also finds that this Act creates other difficulties for small companies. It also provides evidence that supports that argument that Section 404, as currently drafted and implemented by the Securities and Exchange Commission (SEC), provides little benefit to investors. Notably, the report finds that those who finance privately held companies that do not intend to go public do not impose requirements on private companies similar to those in the Sarbanes-Oxley Act.

Section 404. The "Sarbanes-Oxley Act of 2002" was HR 3763 in the 107th Congress. It is now Public Law No. 107-204. Its main sponsors were Sen. Paul Sarbanes (D-MD) and Rep. Mike Oxley (R-OH).

Section 404 is titled "Management assessment of internal controls". It provides, in full, as follows:

GAO Findings. The report states that "While smaller companies historically have paid disproportionately higher audit fees than larger companies as a percent of revenues, the percentage difference between median audit fees paid by smaller versus larger public companies grew in 2004, particularly for companies that implemented the act's internal control provisions (section 404)." (Parentheses in original.)

The report continues that "Smaller public companies also cited other costs of compliance with section 404 and other provisions of the act, such as the use of resources for compliance rather than for other business activities. Moreover, the characteristics of smaller companies, including resource and expertise limitations and lack of familiarity with formal internal control frameworks, contributed to the difficulties and costs they experienced in implementing the act’s requirements."

The report suggests that the Section 404 requirements, "along with other factors, may have been a contributing factor in the reduced number of initial public offerings (IPO) issued by small companies. However, the overall performance of the stock market and changes in listing standards also likely affected the number of IPOs."

The report also discusses some of the burdens imposed upon small companies. It states that "some of the smaller companies that responded to our survey reported that their CFOs and accounting staff spent as much as 90 percent of their time for the period leading up to their first section 404 report on Sarbanes-Oxley Act compliance-related issues."

The report adds that "many of the smaller public companies incurred missed ``opportunity costs´´ to comply with the act that were significant. For example, nearly half (47 percent) of the companies that responded to our survey reported deferring or canceling operational improvements and more than one-third (39 percent) indicated that they deferred or cancelled information technology investments." (Parentheses in original.)

The report also offers evidence that is relevant to the question of whether some of the requirements of the Act are necessary to protect investors. For example, it states that "For those privately held companies not intending to go public, our research and discussions with representatives of financial institutions suggested that financing sources were generally not imposing requirements on private companies similar to those contained in the Sarbanes-Oxley Act as a condition for obtaining access to capital or other financial services."

The American Electronics Association (AEA) released a report [23 pages in PDF] last titled "Sarbanes-Oxley Section 404: The Section of Unintended Consequences and its Impact on Small Business". It states that "Skyrocketing implementation costs have put high-tech companies in the position of having to delay major projects at a time when many are struggling to compete with low-cost competition from Asia. Section 404 implementation is the quintessential example of the law of unintended consequences, with the biggest victim being small business."

William Archey, the head of the AEA, spoke at a luncheon on Capitol Hill on April 20, 2006. He stated at that event that Section 404 relief is one of the top regulatory priorities of small tech companies.

The Act's main sponsors were Sen. Sarbanes and Rep. Oxley. Both have announced that they will not run for re-election in November of 2006. As a consequence, no bills have yet been introduced in the Congress. Any bills on this subject would likely not be introduced until the 110th Congress convenes in January of 2007, out of courtesy to the retiring sponsors. Also, much of the reform sought by small companies could be addressed through implementation of Section 404 by the SEC and Public Company Accounting Oversight Board (PCAOB)

On Wednesday, May 10 at 9:00 AM through 5:30 PM the Securities and Exchange Commission (SEC) and the PCAOB will host a roundtable meeting regarding the reporting and auditing requirements of the Sarbanes Oxley Act, including Section 404 requirements. See, SEC notice.

Rep. Mike OxleyThe House Financial Services Committee, which Rep. Oxley chairs, held an oversight hearing on May 3, 2006, that addressed many issues. Rep. Oxley (at right) wrote in his opening statement [PDF] that "It is true that the implementation of the Act’s internal control requirements has been more onerous than originally predicted. However, it is critical that we allow our regulators to rectify the implementation difficulties that public companies and their auditors face."

He added, "In this regard, I am encouraged by the efforts that Chairman Cox and the Commission have made and continue to make in engaging in discussions with public companies and auditors about these internal control requirements. Following up on last year’s Roundtable, next week the Commission and the Public Company Accounting Oversight Board will be hosting a Roundtable on Internal Controls to discuss second-year experiences with these provisions."

Also, on March 2, 2006, Rep. Oxley and Rep. Richard Baker (R-LA) wrote a letter [PDF] to SEC Chairman Chris Cox that addressed Section 404.

The GAO prepared this report at the request of Sen. Olympia Snowe (R-ME) and Sen. Michael Enzi (R-WY). Sen. Enzi is a member of the Senate Banking Committee, which will have jurisdiction over any Section 404 relief legislation.

People and Appointments

5/8. President Bush announced his intent to nominate Eric Solomon to be Assistant Secretary of the Treasury for Tax Policy. He is currently acting Deputy Assistant Secretary for Tax Policy and Deputy Assistant Secretary for Regulatory Affairs. He has also worked for Ernst & Young, Cadwalader Wickersham & Taft, and Drinker Biddle & Reath. See, White House release.

Michael Hayden5/8. President Bush nominated Michael Hayden (at right) to be Director of the Central Intelligence Agency. He is a General in the U.S. Air Force. He was previously Director of the National Security Agency (NSA). See, story titled "Bush, Gonzales & Hayden Discuss Presidential Intercepts and PATRIOT Act" in TLJ Daily E-Mail Alert No. 1,276, December 20, 2005, and story titled "Gen. Hayden Defends NSA E-Surveillance Program" in TLJ Daily E-Mail Alert No. 1,295, January 24, 2006. If confirmed by the Senate, he would replace Porter Goss, who resigned on Friday, May 5, 2006. See, transcript of White House event.

5/8. The American Bar Association (ABA) issued a second opinion on Brett Kavanaugh, President Bush's nominee to be a Judge of the U.S. Court of Appeals (DCCir). The ABA initially opined that Kavanaugh is "well qualified". The ABA changed this rating to "qualified". Kavanaugh is one of the Court of Appeals nominees opposed by Senate Democrats. The White House press office released a statement in support of Kavanaugh. It states that "He is responsible for coordinating virtually all documents to and from the President. He previously served as Senior Associate Counsel and Associate Counsel to the President, during which time he worked on numerous constitutional, legal, and ethical issues."

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5/8. The Federal Communications Commission (FCC) released a Further Notice of Proposed Rulemaking (NPRM) [14 pages in PDF] in its proceeding titled "In the Matter of Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities [;] Misuse of Internet Protocol (IP) Relay Service And Video Relay Service". The FCC adopted this item at its meeting of May 3, 2006. It is FCC 06-58 in CG Docket No. 03-123.

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5/6. President Bush gave a speech at Oklahoma State University. He said that "advances in technology will transform lives -- and they will present you with profound dilemmas. Science offers the prospect of eventual cures for terrible diseases, and temptations to manipulate life and violate human dignity. With the Internet, you can communicate instantly with someone halfway across the world -- and isolate yourself from your family and your neighbors. Your generation will have to resolve these dilemmas. My advice is, harness the promise of technology without becoming slaves to technology. My advice is, ensure that science serves the cause of humanity, and not the other way around."

Go to News from May 1-5, 2006.