2nd Circuit Rules Against IRS on Excise Tax on Phone Service

April 27, 2006. The U.S. Court of Appeals (2ndCir) issued its short per curiam opinion [PDF] in Fortis v. USA, affirming the judgment of the District Court, and following the precedent of three other circuits, regarding the Internal Revenue Service's (IRS) illegal collection of excise taxes on certain telecommunications services, in violation of Sections 4251 and 4252 of the Internal Revenue Code.

The Court of Appeals wrote that "At issue is whether the federal excise tax statute, 26 U.S.C. § 4251, et seq., applies to the telephone services used by Fortis during that time, and in particular, whether the provision of that statute that defines taxable toll telephone service as a ``telephonic quality communication for which (a) there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication and (b) the charge is paid within the United States´´".

The Court of Appeals did not bother itself to refute, or even mention, the legal arguments advanced by the IRS.

It concluded in a few brief paragraphs that the District Court, which granted summary judgment to the taxpayer, wrote "thorough and well-reasoned opinions", and that 11th, 6th, and D.C. Circuits have already reached the same conclusion "for substantially the same reasons".

This per curiam opinion may have been written by a law clerk.

There are billions of dollars in taxation of phone customers at issue. The IRS is going to extraordinary lengths to defend its claim to these tax revenues. The Court of Appeals brief and dismissive treatment of the IRS's appeal can be understood when viewed in the context of the language of the statute, and the unanimous conclusions of other circuit courts. The plain meaning of the statute does not permit the IRS to collect the tax that it continues to collect. Moreover, although three other circuits have ruled that the IRS cannot collect this tax, it continues to defy the courts.

Statute. These cases concern 26 U.S.C. § 4251, which imposes a 3 percent excise tax on some, but not all, communications services. This tax is sometimes referred to by its opponents as the "Spanish American War tax", since it was originally imposed to help fund that war. 26 U.S.C. § 4252 contains the applicable definitions.

§ 4251(b) provides that the term ''communications services'' means "(A) local telephone service; (B) toll telephone service; and (C) teletypewriter exchange service". These cases involve "toll telephone service".

26 U.S.C. § 4252(b) provides that "toll telephone service" means

That is, 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 these cases assert that "and" means "and". The IRS asserts that "and" means "or".

The IRS is collecting billions of dollars in taxes where the charge does not vary with distance, in violation of the plain meaning of the statute.

11th Circuit. This is the IRS's fourth loss before circuit courts. The IRS's first appeals court loss on this issue was before the U.S. Court of Appeals (11thCir) in ABIG v. IRS. See, See May 10, 2005 opinion [22 pages in PDF], and 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.

6th Circuit. The IRS lost again before the U.S. Court of Appeals (6thCir) in Office Max v. US. See, November 2, 2005, opinion [20 pages in PDF] and story titled "IRS Loses Another Appeal Regarding 3% Excise Tax" in TLJ Daily E-Mail Alert No. 1,246, November 3, 2005.

The Court wrote that ""When a party presents the question whether ``and´´ means ``or,´´ it is tempting to be dismissive of the claim or, worse, to make a crack about the demise of the rule of law." However, it went on to explain in a detailed opinion that "and" does in fact mean "and".

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.

Following this opinion, providers of telecommunications services, including wireless service providers, local exchange carriers, cable companies, and the trade groups that represent them, wrote a letter to the Secretary of the Treasury, John Snow. See also, story titled "Companies Write Snow Regarding IRS Disregard for Court Opinions on 3% Excise Tax" in TLJ Daily E-Mail Alert No. 1,270, December 12, 2005.

DC Circuit. The IRS lost yet again before the U.S. Court of Appeals (DCCir) in Amtrak v. US. The National Railroad Passenger Corporation, better known as Amtrak, is another phone service customer that paid the taxes that the IRS is not permitted to collect by Section 4252.

The Court held that the meaning of the statute is "unambiguous". Hence, it concluded that if the IRS wants to collect taxes on the phone services at issue, "the IRS must take its case to Congress, not this court".

See, December 9, 2005, opinion [11 pages in PDF]. 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.

IRS Defiance of Judicial Authority. The IRS has not petitioned for writ of certiorari in any of these cases. Rather, the IRS has announced its defiance of judicial authority.

On October 26, 2005, the IRS announced in a notice [PDF] that it will violate the holding 11th Circuit in the ABIG case. It wrote that it "will continue to assess and collect the tax under § 4251 on all taxable communications services, including communications services similar to those at issue in the cases. Collectors should continue to collect the tax, including from taxpayers within the jurisdiction of the United States Court of Appeals for the Eleventh Circuit."

The IRS added in its notice that "Persons paying for taxable communications services (taxpayers) are required to pay the tax to a collecting agent (the person receiving the payment on which tax is imposed), and collecting agents are required to pay over the tax to the United States Treasury and to file the required returns. Taxpayers may preserve any claims for overpayments by filing administrative claims for refund with the Service pursuant to § 6511. Taxpayers are advised, however, that these claims, including claims for which appellate venue would lie in the United States Court of Appeals for the Eleventh Circuit, will not be processed while there are pending cases in other United States Courts of Appeals." (Parentheses in original.)

See also, story titled "IRS Announces That It Will Violate Court of Appeals Ruling Regarding Excise Tax on Phone Service" in TLJ Daily E-Mail Alert No. 1,241, October 27, 2005.

Moreover, the IRS has offered some indication that it may be considering further expanding the excise tax, in the absence of statutory authority, to new technologies. See, story titled "IRS Publishes Advance NPRM Regarding Expanding the Excise Tax on Telephones to Include New Technologies" in TLJ Daily E-Mail Alert No. 931, July 6, 2004.  And see, story titled "Rep. Cox Urges Bush to Instruct IRS Not to Expand Excise Tax on Phones" in TLJ Daily E-Mail Alert No. 945, July 26, 2004.

Reaction. David Cohen, a VP at the U.S. Telecom Association, wrote in a release that "The 2nd Circuit decision affirms what three other circuit courts have already found -- the collection of the federal excise tax is unlawful. With this latest decision, it's time for the government to resolve this issue and stop enforcing the illegal application of the telephone excise tax."

No one at the IRS or DOJ contacted by TLJ has been willing to speak about these cases, or this issue, except to say that they will not talk to TLJ about these cases, or this issue.

The present 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.