Thursday, November 17, 2005

Tax Thursday III: IRS stonewalls the courts on $9 billion of telephone tax refunds.
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. -- OfficeMax, Inc. v. U. S.
In the last year and a half at least eight federal court decisions (I'm losing count) have held the federal tax on long-distance telephone service as commonly collected by the IRS to be illegal. Most of these decisions have been on summary judgment, meaning the court felt the IRS didn't even have a case worth arguing at trial.

The key issue is that the decades old provision of the Tax Code that creates the tax specifies that it is to be imposed on long-distance calls that are billed individually by both time and distance, while few long-distance services bill calls that way any more. When calls are billed any other way -- by minutes used only, bulk rate, negotiated rate, "friends and family", or whatever else --- the courts unanimously have held them to be not subject to tax, and ordered taxes paid to be refunded. (Refunds can be claimed for taxes paid up to three years back).

The IRS's answer has been that the "and" of the law should be read as "or", since that is what's needed for it to be able to keep collecting the tax as the industry changes. But the courts haven't bought it. (More analysis, background, and case citations have been posted previously).

While the decisions were piling up against it the IRS decided to not pay any refunds while hoping to win on appeal. But this strategy took a big hit when the first appeals court decision not only came in solidly against it but also overturned the only decision the IRS had won at the trial court level. American Bankers Ins. Group v. U.S. (.pdf), 408 F.3d 1328, 11th Circuit.

In response to which the IRS has just issued a formal statement (Notice 2005-79) saying it won't appeal American Bankers to the Supreme Court -- but won't heed it either. Because ... well ... just because. It says everyone has to keep paying the tax and it won't be issuing any refunds.

Promptly after which, a second court of appeals weighed in against the IRS position, OfficeMax, Inc. v. U.S. (.pdf) November 2, 2005, Sixth Circuit.

So the situation becomes interesting. The Circuit Courts of Appeal are the final arbiters of the law for the states within their respective circuits, unless and until the Supreme Court overrules them. Two circuits determining the law for seven states (Kentucky, Michigan, Ohio and Tennessee, Sixth; Alabama, Florida, and Georgia, Eleventh) now have struck down the telephone tax. The IRS is not appealing those decisions. Yet it is continuing to collect the tax, and refusing refunds, even within those circuits.

Its hope at this point seems to be that either some other circuit will reach a contrary decision creating a conflict between the circuits that the Supreme Court will resolve in its favor -- although it isn't appealing to the Supreme Court in the meantime -- or that Congress will enact a tax law retroactively reasserting the tax.

Yet the unanimous and one-sided nature of the decisions against it to date make the former seem unlikely, and it seems even less likely that the Republican anti-tax increase Congress will make any move re-impose the tax retroactively, should the courts maintain their position. To the contrary, a bill with 176 co-sponsors to repeal the telephone tax is pending in the House today. (The House voted by a bipartisan 420-2 to repeal the tax in 2000, but the Senate didn't act.)

In the meantime the amount of tax at stake has risen to $9 billion according to the IRS, and continues to grow.

Something's got to give here sooner or later. Absent the unlikely bailout by the Congress or the Supreme Court, even the IRS can't defy the courts forever. But the Washington politicians aren't eager to write out $9 billion in refund checks in one year either, not with the sudden resurgence of interest in fiscal responsibility. So all parties continue to stall for now.

But they won't be able to stall forever.

It's remarkable how little attention this whole story has gotten in the general press, considering how many people and businesses it could affect. So tell your friends. They may be entitled to a tax refund -- and if they are willing to wait a little while after filing for it, they may get it.