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United States District Court, Northern District of Illinois, E.D

November 27, 1972


The opinion of the court was delivered by: Tone, District Judge.


This action was filed by the plaintiff, Econ, Inc., against the defendant, Illinois Bell Telephone Company in the Circuit Court of Cook County, Illinois. Illinois Bell removed the case to this Court and joined the United States as a third party defendant. The plaintiff asserts that it is a common carrier and seeks, on its own behalf and as representative of a class of all other Illinois common carriers, the return of monies collected by the defendant and remitted to the United States as a federal excise tax on certain telephonic communications. Plaintiff alleges that there is no statutory authority for collecting an excise tax from common carriers who make long distance calls and calls of two or more units of service.

The United States has moved to dismiss the complaint on the ground that this Court lacks subject matter jurisdiction of the controversy, and Illinois Bell has answered the complaint with the same contention.

At issue in the case is the proper construction of Sections 4251-4253 of the Internal Revenue Code. Section 4251 imposes a federal excise tax on the charges for telephone service, defined and subject to exemptions as follows:

"§ 4252. Definitions.

    "(b) Toll telephone service. — For purposes of
  this subchapter, the term `toll telephone service'
  means —

      "(1) 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, and

      "(2) a service which entitles the subscriber,
    upon payment of a periodic charge (determined
    as a flat amount or upon the basis of total
    elapsed transmission time), to the privilege of
    an unlimited number of telephonic
    communications to or from all or a substantial
    portion of the persons having telephone or
    radio telephone stations in a specified area
    which is outside the local telephone system
    area in which the station provided with this
    service is located."

"§ 4253. Exemptions.

    "(f) Common carriers and communications
  companies. — No tax shall be imposed under section
  4251 on the amount paid for any toll telephone
  service described in section 4252(b)(2) to the
  extent that the amount so paid is for use by a
  common carrier, telephone or telegraph company, or
  radio broadcasting station or network in the
  conduct of its business as such."

Econ's claim is based upon the contention that the service provided to it falls within Section 4252(b)(2) rather than 4252(b)(1) and is therefore exempt from taxation. The telephone company and the Government argue to the contrary.

The defendants say that the plaintiff primarily seeks a refund of a federal tax, with incidental injunctive and declaratory relief. They argue, and plaintiff appears to concede in its reply brief, that plaintiff cannot sue for a tax refund in either a federal or a state court without first filing a claim for a refund with the Internal Revenue Service, 26 U.S.C. § 7422. There is no allegation in the complaint that a claim for refund was filed. If this is indeed a suit to recover a federal tax refund, the absence of such an allegation is a fatal jurisdictional defect. 26 U.S.C. § 7422(a); England v. United States, 261 F.2d 455 (7th Cir. 1958); Agron v. Illinois Bell Telephone Co., No. 67 C 2041, decided August 4, 1969 (N.D.Ill.). Moreover, a state court has no jurisdiction to entertain an action to recover federal tax payments, because the United States has waived its sovereign immunity from suit only for tax refund actions brought in the federal district courts or the Court of Claims. 26 U.S.C. § 7422, 28 U.S.C. § 1346. Removal from the state court does not cure the jurisdictional defect. Minnesota v. United States, 305 U.S. 382, 388, 59 S.Ct. 292, 83 L.Ed. 235 (1939).

Plaintiff contends, however, that this action seeks not the refund of a federal tax but the recovery of "an exaction merely in the guise of a tax" and an injunction against future "exactions" of this kind. Plaintiff relies on Enochs v. Williams Packing Co., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962), which holds that where, "under the most liberal view of the law and the facts, the United States cannot establish its claim" that the monies paid to the United States constitute a valid tax, and where plaintiff has no adequate remedy at law, the provision proscribing suits for injunctive relief restraining the collection of federal taxes, 26 U.S.C. § 7421(a), is inapplicable. We need not reach the question whether the Enochs rule permits recovery of past "exactions" in addition to an injunction. The Enochs case has no application here because it cannot be said "that, under the most liberal view of the law and the facts" the exaction was not authorized by the Internal Revenue Code. Rather, it appears that the defendants may very well establish their claim that 26 U.S.C. § 4253(f) does not exempt common carriers from the federal excise tax on the telephone service in question, which is ordinary long distance calls and calls of two or more units of service. Indeed, without attempting to decide finally the substantive question of statutory construction, the ordinary, common-sense meaning of the words of the statute seem to lend support to the Government's interpretation. At any rate, the payments in question here were clearly collected by Illinois Bell and remitted to the United States in good faith as excise taxes. The issue in the case is whether they were properly collected as excise taxes, and there is enough basis in the statute to assume that their collection may have been proper as excise taxes to make this action essentially a suit for a federal tax refund and not a suit for recovery of "an exaction merely in the guise of a tax." The case must therefore be governed by the jurisdictional requirement of 26 U.S.C. § 7422. If the plaintiff wishes an authoritative determination by a federal court of his asserted exemption, he may have one by filing a claim for a refund with the Internal Revenue Service and, upon its denial, instituting a suit in the district court against the United States directly as the real party in interest. Agron v. Illinois Bell Telephone Co., supra, 325 F. Supp. 487, 488 (N.D.Ill. 1970), rev'd on other grounds, 449 F.2d 906 (7th Cir. 1971).

The motion to dismiss is granted and the cause is dismissed for lack of subject matter jurisdiction.


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