Long-distance telephone excise tax refunds - 2006 tax returns affected.

The war is over--the Spanish-American War, that is. To help pay for it, Congress had enacted a telephone tax as part of the War Revenue Act of 1898. It was originally a sort of luxury tax, because only the wealthy had telephones then. The tax remained (via periodic legislative reenactments) until now, but after the government lost a number of Federal cases, Treasury finally surrendered; see IR News Release 2006-82 and Keenan, Magin and Sylvia, Tax Practice & Procedures, "Government Ends Long-Distance Phone Excise Tax Dispute," TTA, July 2006, p. 428.

Refunds

Treasury announced in Notice 2006-50 that it will stop litigating the issue and refund the excise tax billed for long-distance calls (not local service) on landline, Internet and wireless services, over the past three years (i.e., generally, the 41 months from March 1, 2003-July 31,2006). Interest will be paid on refunds. Form 1099-INT, Interest Income, will follow in 2008 to noncorporate taxpayers for interest on refunds paid in 2007.

Claim Process

To make the process easier, refunds will be issued as a refundable credit on taxpayers' 2006 returns filed in 2007. Individuals and businesses not otherwise required to file an income tax return will have to file for 2006 to claim a refund. Individual nonfilers will use new Form 1040EZ-T, Claim for Refund of Federal Telephone Excise Tax, to make the claim. Except for certain individuals (discussed below), all taxpayers must calculate the exact amount of excise tax paid. The refund or credit will be issued only on request on the respective 2006 return (Forms 1040 for individuals; 1041, U.S. Income Tax Return for Estates and Trusts, for estates and trusts; 1065, U.S. Return of Partnership Income, for partnerships and limited liability companies; 1120 for corporations; and 990-T, Exempt Organization Business Income Tax Return, for exempt organizations) and by completing new, to-be-released Form 8913. Fiscal-year entities will claim the refund on their fiscal-year 2006/2007 returns. If the tax was deducted as a business expense, the refund is taxable income when received or accrued. The IRS has not commented as to who claims the refund on telephones billed in the name of employees or partners whom the business pays for or reimburses. Also, a question remains as to how (if at all) to use the standard amount (see below) on behalf of a taxpayer who passed away during the 2003-2006 excise tax refund period.

Refund amount: Individuals should not expect a windfall. For individuals who do not want to retrieve old phone bills, IR News Release 2006-137 establishes an optional safe-harbor excise tax refund for individuals, based on the number of exemptions claimed on the 2006 Federal income tax return. For one exemption, the refund will be $30, $40 for two exemptions, $50 for three exemptions and $60 for four or more exemptions. The fact that the benefit of exemptions is phased out for high-income taxpayers is irrelevant. The standard amount is for the entire three years (not per year) and includes interest. The IRS has not said how (if at all) it will break out the de minimis interest income to be reported by a nonbusiness claimant or whether it will issue a Form 1099-INT, if one is required.

Get The Bill?

It is unclear the extent to which telephone companies and wireless providers will offer a history of the Federal excise tax a customer paid during the eligible period. BellSouth, Nextel and Sprint have announced charges for retrieving old invoices. (On request from Cablevision Optimum Lightpath, the author's firm did receive a list of the Federal excise tax paid for each month it has been a customer.) The IRS is looking into "... a reasonable method for estimating telephone excise tax refund amounts" that can be used by businesses and nonprofit organizations. The tax has disappeared from bills beginning with the period including Aug. 1, 2006.

FROM ALAN E. WEINER, CPA, J.D., LL.M., SENIOR TAX PARTNER, HOLTZ RUBENSTEIN REMINICK LLP, LONG ISLAND, NY