Free Response - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS _____________________________________ : : : : Plaintiff. : v. : : UNITED STATES OF AMERICA, : : Defendant. : : _____________________________________ : LOCUS TELECOMUNICATIONS INC.

Case No. 05-1184T Sr. Judge Robert H. Hodges, Jr.

KDI DISTRIBUTION, INC.'S REPLY TO LOCUS'S OPPOSITION AND THE GOVERNMENT'S RESPONSE TO KDI'S MOTION TO INTERVENE Proposed intervenor KDI Distribution, Inc. d/b/a Krossland Communications, Inc. ("KDI") submits this reply to Locus Telecommunications Inc.'s ("Locus's") Opposition to KDI's Motion for Leave to Intervene ("Opposition") and to the Government's Response to KDI's Motion for Leave to Intervene in the above-captioned case. Contrary to the allegations of Locus and the Government, KDI has standing to participate is this case, and its participation will not prejudice either Locus or the Government. Indeed, because KDI is the taxpayer, and it and Locus are seeking the same telephone excise tax refund, the interests of efficiency and justice can only be served, and the risk that the Government will have to refund the same tax can only be avoided, by resolving KDI's and Locus's claims in a single forum that yields a single judgment binding on all parties. The Court should therefore either allow KDI to intervene in this case or grant KDI's Motion to Consolidate this case and its own Complaint seeking the

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refund at issue. BACKGROUND As the Court is aware, on June 19, 2006, the IRS published Notice 2006-50, 2006-25 I.R.B. 1141, in which it sunset the telephone excise tax on long distance services and offered to refund the telephone excise tax paid by taxpayers from March 2003 through July 2006. On January 29, 2007, in Notice 2007-11, 2007-5 I.R.B. 405, the Service expressly extended the right to these refunds to the first non-carriers in the prepaid telephone card ("PTC") distribution chain. Id., § 6(c). KDI is a distributor of PTCs. Consistent with the IRS's directives, on or about August 2, 2007, it timely filed a claim for refund of the telephone excise tax that had been collected and remitted by Locus, the carrier that provided KDI with PTCs. After auditing the refund claim the IRS issued an informal notice of disallowance dated June 20, 2008, in which it refused to refund the taxes KDI paid through Locus. It gave two reasons: "Locus ... is currently involved in litigation with the government concerning its entitlement to the refund of telephone excise taxes and KDI ... signed an irrevocable consent letter to allow Locus ... to recover the refunds of the federal excise taxes." Based on the Service's rationales for disallowing its refund claim, on July 16, 2008 KDI filed a Motion to Intervene in this case, and on July 31, 2008 KDI filed a refund Complaint, Notice of Related Cases, and Motion to Consolidate (attached hereto as Attachment A). As the statutory taxpayer and the entity that paid all of the money received by Locus for the PTCs that are the subject of KDI's refund claim, KDI is entitled to the refund.
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Because the refund can only be given to one entity, and both Locus and KDI claim it, KDI should be permitted to intervene in the instant case. If the Court determines that KDI has not met the Rule 24(a) standard for intervention of right, KDI requests in the alternative that its Motion to Consolidate be granted, which will have the same practical effect.1 KDI's participation in either fashion will advance the public's strong interest in the efficient and orderly administration of justice and avoid the possibility of inconsistent judgments. The Court will then hear arguments from both claimants and the Government concerning which claimant is entitled to the refund in question, and issue a single judgment that will bind all of the parties. ARGUMENT Locus offers three reasons for denying KDI's Motion for Leave to Intervene: (1) untimeliness; (2) prejudice to Locus; and (3) lack of standing. None withstands scrutiny. A. KDI's Motion is Timely

In August 2006, KDI executed a letter (drafted by Locus) that purported to give KDI's "irrevocable consent that Locus recover the refunds of the federal excise taxes for which it has filed with the Internal Revenue Service ...." Exhibit B to Locus Opposition.2 Approximately one year later--in July 2007--KDI sent a letter to Locus rescinding the
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This procedural option was endorsed by the Government in its Response to the Motion of KDI to Intervene. See Government Response at 2. As discussed below, the consent letter did not say on whose behalf Locus was seeking the refunds in question. And the cover letter that accompanied it included a number of statements that are either misleadingly ambiguous or incorrect, e.g., that "Locus' sales prices do not include taxes."
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purported "consent" and explaining that "[a]s the taxpayer that paid the tax, this entity intends to claim the [refund] to which it is legally entitled." Rescission Letter from KDI to Locus (attached hereto as Attachment B). KDI copied the IRS on the revocation, and shortly thereafter filed its own refund claim. As noted above, that claim was informally disallowed by the Service in June 2008. Approximately one month later KDI filed the instant Motion to Intervene and its own refund Complaint. KDI's Motion to Intervene is not untimely. Motions for summary judgment have not yet been filed on the dispositive issue in this case--which entity bore the economic burden of the tax. Moreover, KDI had no reason to believe that Locus and the IRS would not honor KDI's revocation of its "consent," given that the revocation was transmitted to Locus and the Service over a year before Locus filed a motion seeking a declaration of its entitlement to the taxes paid from the funds it collected from KDI.3 B. KDI's Intervention Will Not Prejudice Locus Because KDI is willing to forego discovery on the issue of economic burden, neither Locus nor the Government will be prejudiced by KDI's participation in the summary judgment proceedings on this issue. Assuming KDI is granted access to the documentary evidence already in the record, it seeks no change to the summary judgment schedule set forth in the Joint Status Report of August 15. Under this schedule, Locus will file a Motion for Summary Judgment on September 15, and the Government and Locus will file Oppositions and Cross Motions in accordance with the

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Court's rules. C. KDI Has Standing to Intervene Locus's contention that KDI lacks standing to participate in this proceeding is premised on a number of conclusions of law and statements of fact that are both critical to Locus's argument and incorrect. In particular, Locus's standing argument hinges on its contentions that KDI has no legally protectable interest in the refund in question; that Locus bore the economic burden of the tax (even though it paid the tax with funds collected from KDI and its other customers); and that KDI's "consent" to have Locus claim its refund was unambiguous, valid, and irrevocable. As detailed below, none of these assertions can survive scrutiny. First, because KDI "claims an interest relating to the property or transaction which is the subject of the action and ... is so situated that the disposition of the action may as a practical matter impair or impede [KDI's] ability to protect that interest," RCFC 24(a)(2), KDI unquestionably has standing to participate in this lawsuit.4 The refund will be given to either KDI or Locus, but not both. If Locus is awarded the refund, KDI's ability to protect its interest will plainly be impaired. Locus concedes as much it its Opposition: "if [Locus] meets the applicable burden of proof it would be dispositive of KDI's claim as well." Locus Opposition at 7.
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KDI sent its revocation letter in July 2007, and Locus's Motion for Summary Judgment is not due to be filed until September 15, 2008. See Brookner v. United States, 27 Fed. Cl. 423, 424 (1993) ("in the absence of a statutory right, a person seeking to intervene must have an interest in the transaction in suit that would be vindicable in its own right under the court's existing jurisdiction").
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Indeed, KDI's interest in the subject of this action is so tangible and immediate that had it not moved to intervene, the Court or another party could almost certainly have required its joinder pursuant to RCFC 19(a) as a person that claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.5 Against this background, allowing all of the interested parties--KDI, Locus, and the Government--to plead their cases to one tribunal, and be bound by that tribunal's decision, promotes the interests of efficiency and the orderly administration of justice. On the other hand, resolving the cases separately, as suggested by Locus, would needlessly consume judicial, governmental, and private resources, and could conceivably result in the Government being forced to pay the appropriate refund (plus interest) twice. Locus's argument that KDI has no protectable interest in the subject matter of the instant lawsuit is even weaker. Pursuant to Section 4251(d)(1) of the Internal Revenue Code of 1986, as amended ("Code"),6 and Treas. Reg. § 49.4251-4(d)(1),7 KDI--the

See Klamath Irrigation Dist. v. United States, 64 Fed. Cl. 328, 329 (2005) ("the findings required by RCFC 24(a)(2) are identical to those required by RCFC 19(a)(2), dealing with joinder of persons needed for just adjudications, revealing an obvious symmetry between these two gatekeeper provisions"). "[I]in the case of communications services acquired by means of a prepaid telephone card--(A) the face amount of such card shall be treated as the amount paid for such communications services, and (B) that amount shall be treated as paid when the card is transferred by any telecommunications carrier to any person who is not such a carrier." 26 U.S.C. § 4251(d)(1) (emphasis added).
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first non-carrier in the PTC distribution chain--is the taxpayer. Locus, an FCC-certified interstate common carrier, is merely a collection agent for the tax. Second, Locus contends that KDI lacks standing to participate in this case because Locus bore the economic burden of the tax. But that has not been established; to the contrary, it will be the focus of the forthcoming summary judgment motions, in the course of which Locus will be required to demonstrate the validity of its argument by a preponderance of the evidence. Tenneco v. United States, 17 Cl. Ct. 345, 350 (1989), aff'd, 899 F.2d 1227 (Fed. Cir. 1990) (table). Given that Locus's entire revenue stream (including the funds used to pay the tax) is and was provided by customers such as KDI, Locus's claim that it somehow bore the economic burden of the tax is likely to fail. As the Code and the IRS's regulations recognize, KDI paid the excise tax to Locus when it purchased PTCs from Locus, and Locus then remitted the tax portion of the payments to the IRS. Third, Locus makes a great deal of KDI's putative consent to Locus's pursuit of its claim to a refund of the taxes in question. But there are a number of problems with this "consent." More than a year ago, KDI sent a letter to Locus withdrawing its "consent" and informing Locus that "as the taxpayer that paid the tax, [KDI] intends to claim the [telephone excise tax refund] to which it is legally entitled." See Rescission Letter from KDI to Locus. Locus copied the IRS on this correspondence. Both Locus
"Under section 4251(d), the section 4251(a) tax is imposed on the transfer of a PTC by a carrier to a transferee. The person liable for the tax is the transferee." 26 C.F.R. § 49.4251-4(d)(1) (emphasis added). "Transferee" is defined as "the first person that is not a carrier to whom a PTC is transferred by a carrier." Id. § 49.4251-4(b).
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and the IRS were thereby placed on notice that KDI believed that it was entitled to the refund in question and intended to claim it. Moreover, although one of the two bases for the IRS's rejection of KDI's refund claim was that KDI had "signed an irrevocable consent letter to allow Locus ... to recover the refunds of the federal excise taxes," the IRS (and Locus) have taken steps that acknowledge the validity of KDI's rescission letter. Specifically, when Locus and the Government executed and filed a Joint Stipulation settling part of the instant case seven months ago, KDI was not on the list of "customer[s] ... that provided consents and the corresponding amounts of FET for which the IRS has paid refunds to [Locus]." Joint Stipulation for Partial Dismissal of Proceedings at 1 and Schedule A (January 22, 2008). Finally, because KDI's "consent" to allow Locus to claim KDI's refund was secured through misrepresentation and is both ambiguous and lacking in consideration,8 either the "consent" was void ab initio or KDI's revocation of it was valid. In its cover letter to the consent form, Locus stated without support or substantiation that "Locus' sales price do not include taxes ... and hence [Locus] does not collect the FET on top of the value of each prepaid card that we sell ...." Letter from Locus to Customer, Exhibit A to Opposition. That statement was simply untrue--Locus, having
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If Locus's letter is to be taken at face value, because KDI waived its right to an excise tax refund in excess of $3 million in exchange for ... nothing, the agreement is void for lack of consideration. See Harvey v. NYRAC, Inc., 813 F. Supp. 206, 212 (E.D.N.Y. 1993) ("It is axiomatic that a contract must be supported by consideration which, under New York law, `may consist of some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.'" (quoting Holt v. Feigenbaum, 419 N.E.2d 332, 336 (N.Y. 1981))).

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no PTC revenue other than amounts paid by customers such as KDI for cards, inevitably included the federal excise tax in the price of its product, even if there was no line item on each invoice labeled "federal excise tax." See Riviera Mfg. Inc. v. United States, 307 F. Supp. 916, 918 (D. Colo.1969) ("[P]laintiff urges that it did not list the tax on its invoices. The courts have consistently held that this is not sufficient to prove that the taxpayer bore the burden of the tax."), aff'd, 440 F.2d 780 (10th Cir. 1971). The letter also contained misrepresentations by silence, as when it failed to note that KDI, and not Locus, is the statutory taxpayer under the Code and the IRS's regulations. These critical lapses were buttressed by calculated ambiguity. One searches the letter in vain for a statement that by signing the customer is surrendering its [statutory] rights to the refund in question to the carrier. The consent letter did not say on whose behalf Locus was seeking the refunds in question; it simply said that "[t]he signed letter will assist Locus with our pending case by expediting the process of receiving a refund ...." Letter from Locus to Customer, Exhibit A to Opposition. Based on the letter's language, a customer such as KDI could reasonably have concluded that Locus had filed refund claims on behalf of statutory taxpayers such as KDI, and intended to pay any money secured over to its rightful owners.9 Locus's cover letter and consent form

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This calculated ambiguity stands in sharp contrast to Locus's reaction when KDI rescinded its alleged consent and stated its intention to claim the excise tax refund to which it was legally entitled. Locus's counsel reacted with a series of decidedly unambiguous threats, including baseless accusations of "fraudulent conspiracy that is being perpetrated through interstate commerce using the United States mail all of which when proven true would constitute separate Federal offenses" and threats of other unspecified "civil and criminal liability." Letter from Locus's Counsel to KDI, Exhibit C to Opposition. Locus's counsel neglected to advise KDI to consult counsel, although he did magnanimously offer his services "if you need assistance withdrawing your revocation." Id.

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are so confusing and misleading that one of Locus's customers believed that by signing the form it could incur additional excise tax liability.10 Against this background, Locus should not be permitted to claim that KDI "consented" to allow Locus to jump KDI's claim and obtain the refund to which KDI is entitled. CONCLUSION Because KDI and Locus both seek the same federal excise tax refund, the Court should allow KDI to participate in this case, either as an intervenor or through consolidation of the present proceeding with KDI's own pending claim for the refund. Either course will promote the public interest in the efficient use of judicial resources and in eliminating the risk of inconsistent outcomes, and will prejudice neither Locus nor the Government.

Respectfully submitted, s/ Stephen J. Rosen Henry D. Levine Stephen J. Rosen Levine, Blaszak, Block and Boothby, LLP 2001 L Street, NW, Suite 900 Washington, DC 20036 202-857-2550 Fax 202-223-0833 Attorneys for KDI Distribution, Inc. August 15, 2008

In response, Locus felt compelled to "clarify" its request by "confirming that LB International will not assume any liability for the federal excise tax (FET) by signing the consent form." Letter from Locus to LB International, Exhibit A to Opposition.

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ATTACHMENT A
KDI Complaint, Notice of Related Cases, and Motion to Consolidate

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ATTACHMENT B
Rescission Letter from KDI to Locus

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