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Sunday, July 14, 2024 | Back issues
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Taxpayers Lose Bid for $6.5M in Attorneys’ Fees

(CN) - Taxpayers who sued the IRS over its process of refunding the $8 billion it illegally collected in excise taxes on long-distance phone calls lost their bid for $6.5 million in attorneys' fees and expenses.

A federal judge in Washington, D.C., on Monday denied the petition for fees and dismissed all but one procedural claim against the government.

U.S. District Chief Judge Royce Lamberth said the plaintiffs in two of three class action lawsuits over the IRS' refund process "did not raise the procedural ... claim in their complaints and so cannot now be awarded final judgment on that claim."

Those lawsuits, which were consolidated for pretrial proceedings, claimed that the government illegally collected a 3 percent tax even after cell phones made distance-based billing obsolete.

In 2006, the IRS issued a refund notice telling taxpayers to request refunds on their income tax returns that year. It gave taxpayers two options: They could request a "safe harbor" amount, or they could seek reimbursement for the actual taxes paid, so long as they provided documentation.

Taxpayers challenged this refund process, too. The two class actions filed before the IRS' 2006 refund notice amended their complaints to include the procedural claim. The lawsuit filed after the refund notice alleged that the notice had been issued "without any public notice, public comment or evidence."

U.S. District Judge Ricardo Urbina dismissed the consolidated cases, and the D.C. Circuit reversed. The circuit court later granted the government's petition for a rehearing before a full panel of judges, who upheld the smaller panel's decision to reinstate the case.

On remand, Urbina vacated the IRS' notice and sent the case back to the IRS for further action.

This May, the plaintiffs in all three actions asked the federal court to rule in their favor and award them more than $6.5 million in attorneys' fees and expenses.

Judge Lamberth, who took over the case when Urbina retired in May, agreed with the government that only one of the three lawsuits actually stated the procedural claim in its complaint.

He also denied the plaintiffs' bid for attorneys' fees and costs, saying only one group of plaintiffs qualified as a "prevailing party."

And even in that case, Lamberth ruled, the government was "substantially justified" in issuing the 2006 refund notice and defending it in court.

The taxpayers argued that their lawyers deserved to be reimbursed by the government, because the case has "generated a substantial benefit for more than 100 million taxpayers" who have "already received, or will in the future receive, at least partial refunds."

But Lamberth remained unconvinced by this "common benefit" theory, saying "the burden would be borne by all taxpayers to compensate for a benefit allegedly received by only some of them."

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