• The IRS Likely Owes You Money for Taxes Paid on Long Distance Telephone Calls
  • September 12, 2005 | Author: Brooks E. Harlow
  • Law Firm: Miller Nash LLP - Seattle Office
  • On May 10, 2005, the Eleventh Circuit Court of Appeals reversed a district court decision and held in American Bankers Ins. Group v. U.S. that taxes paid by American Bankers Insurance Group (ABIG) for certain long distance telephone calls should be refunded, as there was no statutory authority for imposition of the tax. The court determined that ABIG was entitled to a refund of over $360,000 for taxes paid on long distance calls made over a three and a half year period. The decision hinged on the fact that ABIG's long distance carrier (AT&T) charged uniform toll rates for intrastate and interstate phone calls, and toll rates for international calls that varied only according to which country was being called. Thus, any business that pays for long distance services in this same or similar manner could be eligible for a substantial refund from the IRS.

    Internal Revenue Code ("Code") Section 4251 of the imposes a tax on certain defined "communications services," including "local telephone service," "toll telephone service," and "teletypewriter exchange service." Long distance phone calls have long been taxed as a "toll telephone service." Recently, however, consumers of long distance telephone services have begun to balk at the tax being imposed for "toll telephone service," since the definition of this service in Code Section 4252 requires that it be billed out based on the time and distance of the call. The evolution of telephone services has almost completely eliminated rates based on the distance of the phone call. Consequently, most tolls charged today for long distance calls are not technically covered by Code Section 4251.

    The Stance Taken by the IRS
    The IRS has argued, and continues to argue, that the definitional language of Code Section 4252 is ambiguous and does not plainly require "toll telephone services" to be variable based on time and distance in order to be taxed. The IRS has further argued (1) that the intent of Sections 4251 and 4252, as proclaimed in Revenue Ruling 79-404, was to tax long distance telephone service tolls based on time or distance; and (2) that the failure of Congress to change the language of Section 4252 after Revenue Ruling 79-404 served as a re-enactment of the statute in affirmance of that revenue ruling. These arguments, however, have been accepted only once, by the district court in ABIG v. U.S., which was subsequently overturned by the Eleventh Circuit decision mentioned above.

    The Weight of Authority
    To date, six district courts and one Circuit Court have squarely addressed the issue of whether telephone customers have the right to a refund for excise taxes previously levied upon long distance telephone calls that were billed according to the time of the call, but without regard for the distance of the call. Of the six district court decisions, only ABIG, which was the first decision to come down, and which was subsequently reversed, found that such long distance calls should be taxed under Code Section 4251. The Government has appealed two of the other five cases to their relative Circuit Courts (and will likely appeal a third), and appears to be steadfast in its stance on this issue. This makes economic sense from the Government's perspective because it maximizes the amount of taxes collected and retained by creating significant transaction costs for those who wish to pursue their rights to refunds. This not only discourages smaller refund filings all together, but also increases the chance of pre-litigation settlement for less than the total refund owed.

    Your Next Step
    In order to be eligible for a refund, you must file an administrative claim with the IRS and allow the Government six months to either accept or deny the claim. If you get no response for six months, or your claim is denied, you may then bring your claim to federal court. The statute of limitations on these claims is two years and runs backwards from the date your administrative claim is filed. If you continue to pay the Code Section 4251 federal excise tax, your claim will also continue going forward. Due to the high probability of a statutory change in the near future, the sooner your claim is filed, the larger your refund could be.

    As more of these cases are decided by the Circuit Courts, and especially if the taxpayers continue to prevail, the Government may soften its stance and begin settling these claims at the administrative stage. Alternatively, however, because there is so much money at stake, the Government may choose to stay firm in its stance until the issue is either decided by the Supreme Court or by an act of Congress.

    If you think your business may be eligible for a sizeable refund, it is in your best interest to find legal counsel with expertise in both the telecom industry and with the related tax issues so that you can get the ball rolling as soon as possible and maximize your potential refund.