Service will continue collecting communications excise tax.

Despite a string of losses in seven district courts and two circuit courts, the Service recently issued Notice 2005-79, confirming that it will continue to assess and collect the Sec. 4251 Federal communications excise tax on long-distance calls, and will to continue to litigate the issue.

Background

Under Sec. 4251, a Federal communications excise tax is imposed on toll telephone services. Sec. 4252(b) defines "toll telephone service" as a communication for which "there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication...." (Emphasis added.) Reading the language of the statute to require the tax to be imposed on charges that vary by both time and distance, taxpayers have sought refunds of long-distance calls, for which the charge varies only on time, not on distance. The IRS has argued that the tax applies when the telephone company assesses a toll charge that varies in amount by either the distance or elapsed transmission time of each individual communication, or both.

Recent Litigation 

Over the past two years, seven district courts have ruled for taxpayers that the 3% Federal communications excise tax does not apply to long-distance voice telecommunications. One court ruled for the government on this issue. However, in May 2005, the Eleventh Circuit reversed the only pro-IRS decision, and held that long-distance (voice) telecommunication services are not subject to the Federal communications excise tax, because the toll charges varied only by the call's elapsed transmission time, not by the time and "distance" of the call, as required by the statute; see American Bankers Ins. Group, 408 F3d 1328 (11th Cir. 2005), rev'g 308 FSupp2d 1360 (SD FL 2004). On Nov. 2, 2005, the Sixth Circuit upheld the taxpayer's victory in OfficeMax, Inc., 309 FSupp2d 984 (ND OH 2004), on similar grounds.

Continuing Stance

In Notice 2005-79, the Service stated:

Persons paying for taxable communications services (taxpayers) are required to pay the tax to a collecting agent (the person receiving the payment on which tax is imposed), and collecting agents are required to pay over the tax to the United States Treasury and to file the required returns.

Further, it noted, taxpayers may preserve claims for overpayment if they file administrative claims for a refund under Sec. 6511. However, such claims--including claims for which the appellate venue would he in the Sixth or Eleventh Circuit--will not be processed while there are pending cases in other circuit courts. Thus, taxpayers who have paid the tax and wish to preserve their ability to receive a refund should continue to file for refund claims to protect their statutory rights. The statute of limitations is open going back three years.

FROM DEAN SCHAFFER, NEW YORK, NY