IRS Loses Law Suit Over Phone Taxes Badly

In 1896 Congress passed an excise tax on long distance phone calls at a rate of 3% based on transmission time and the distance between the two connected points. In 2006 after five different U.S. Circuit Courts agreed that this tax was no longer applicable in response to a variety of different lawsuits the IRS and Treasury agreed to work out a refund plan for the estimated $15 billion owed to the U.S. taxpayers. The Justice Department also agreed to give up trying to defend the tax against lawsuits.

Another lawsuit was eventually filed over the refund scheme established by the IRS. This lawsuit was accusing the government of establishing a refund system that was set up in such a way it made it hard for the taxpayers to collect the refunds owed them. The U.S. District Court upheld the IRS and dismissed the suit but it was appealed to the U.S. Court of Appeals. This court ruled on Friday overturning the District Court and for Mr. Cohen who brought the suit.

Because the Appeals Court was ruling based on whether the Appellant had the right to sue or whether the refunds were to be handled administratively it allowed the court to whack various bureaucracies across their knuckles. The IRS had tried to duck the case by saying that the dispute should be handled through administrative means. The appeals court disagreed saying:

“Once the limits of the protections Congress provided have been surpassed, however, the IRS is subject to the same legal requirements as other administrative agencies. And rightfully so. No agency operates beyond the reach of the law. In this odd case, neither the AIA, the DJA, the tax code’s statutory exhaustion provision, nor the ripeness doctrine apply to protect the IRS from scrutiny.”

The Court also had some fun at the IRS expense through a famous quote

“Comic-strip writer Bob Thaves famously quipped, ‘A fool and his money are soon parted. It takes creative tax laws for the rest.’ In this case it took the Internal Revenue Service’s (“IRS” or “the Service”) aggressive interpretation of the tax code to part millions of Americans with billions of dollars in excise tax collections. Even this remarkable feat did not end the IRS’s creativity. When it finally conceded defeat on the legal front, the IRS got really inventive and developed a refund scheme under which almost half the funds remained unclaimed.”

In a time when the Obama Administration and Congress are looking at either massive intervention in the economy through TARP and the Stimulus as well as possibly restructuring the entire medical system for the country these cases can be a timely reminder that the Government does not necessarily always act properly or for the best interests of their citizens. Of course in the United States we have courts and the rule of law to help us in these kind of instances so that may be some of the future of the medical reform that Congress is working on.