Toll Phone Services Not Subject to Excise Tax

TAX CASE

ecently the District of Columbia Circuit Court of Appeals joined the Sixth and Eleventh Circuits in holding that the federal communications excise tax does not apply to telephone charges calculated solely on a time basis. IRC section 4251 imposes a 3% excise tax on telephone charges based on both the time and the distance of the calls.

When calculating the monthly service charges for the National Railroad Passenger Corporation (Amtrak), the telecommunications company, IBM, considered only one of these factors—the number of minutes the company used. After paying the excise tax, Amtrak filed for a refund. When the IRS did not respond, Amtrak sued in the D.C. district court claiming IRC section 4251 did not apply to telephone charges based on only one variable (in this case, time). When the district court granted summary judgment, the IRS appealed to the D.C. Circuit.

Result . For the taxpayer. In December 2005 the D.C. Circuit held that telephone charges based only on the minutes used were not subject to the communications excise tax.

IRC section 4251 imposes an excise tax on the cost of “toll telephone service,” defined in IRC section 4252(b)(1) as a telephonic communication for which there is “a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication.” The court had to determine whether Congress meant to use the word “and” conjunctively or disjunctively. If a conjunctive interpretation was intended, the tax would be imposed only if the charges were computed based on the time and the distance of the calls. However, a disjunctive interpretation would cause the tax to apply if the charges were based on time or distance.

The IRS argued section 4252 applied to charges for telephone service based either on distance or time. It cited cases in which the Supreme Court decided it was necessary to read the word “and” disjunctively to realize Congress’s intent.

The D.C. Circuit acknowledged that Congress occasionally used the word “and” disjunctively but deemed it did not in this instance. In 1965, when Congress last amended section 4252, AT&T was the only long-distance provider. Congress used the word “and” in the legislation because it mirrored one of AT&T’s calling plans. The court concluded that the legislators used “and” conjunctively as they intended to tax all of the then-existing long-distance plans. Forty years later, AT&T was no longer the sole provider of long-distance services, and many of the new carriers charged customers based only on the number of minutes actually used. The court noted that Congress initially had intended to phase out the excise tax by 1968 and therefore found it unlikely the legislators meant section 4251 to apply to all future long-distance telephone charges. (After several extensions the tax became permanent in 1990.)

The D.C. Circuit disregarded revenue ruling 79-404, which involves only time-based charges. The IRS conceded that the literal language of section 4252 did not include charges based only on time but contended that taxing these charges was consistent with the statute’s intent. The court determined the IRS’s interpretation had enlarged the statute’s unambiguous language. Further, it held that Congress did not implicitly adopt the revenue ruling when it extended the excise tax.

The confusion over section 4252 results from the varied types of modern communications packages. A “plain-meaning” reading of the statute exempts some current rate structures from the excise tax; however, this does not obscure the statute’s legislative intent. Only Congress can amend tax code language to meet current industry practices.

National Railroad Passenger Corp. v. United States , no. 04-5421, CA-DC.

Prepared by Laura Lee Mannino, CPA, LLM, assistant professor of accounting and taxation, St. John’s University, Jamaica, New York.