The Court of Federal Claims held that the statute of limitations applies to taxpayers who paid the telephone excise tax through carriers and were not required to file returns related to it.
Until May 2006, the IRS contended that telephone toll charges that varied only with elapsed time but not distance were subject to the 3% federal excise tax. It had been instructing carriers to collect and remit the tax. Then the IRS conceded that time-only charges were not subject to the tax under IRC § 4252(b)(1) and set up a refund mechanism; however, Notice 2006-50 stated that only taxes collected for services billed between Feb. 28, 2003, and Aug. 1, 2006, were subject to refund.
RadioShack purchased long-distance service from carriers from Jan. 1, 1996, until July 31, 2006, and paid communications excise taxes on it. Because it paid the tax directly to its carriers and those carriers then remitted the tax, RadioShack was not required to file returns for it.
In October 2006, RadioShack filed a refund claim for the taxes paid during the first quarter of 1996. The IRS denied the claim because it was not filed within the period required under section 6511(a): “Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return” must be filed within three years of the return’s filing or two years from when the tax was paid, whichever is later. RadioShack contended the statute of limitations didn’t apply, since RadioShack was not required to file a return for the phone tax.
The Court of Claims disagreed. Holdings by three circuits including its own appellate authority suggest the provision would “effect a discriminatory exemption,” the court said, if construed as literally as RadioShack asserted and in isolation from section 7422(a), which requires a properly filed administrative claim before any suit to recover tax paid. The court also cited U.S. v. Clintwood Elkhorn Mining Co. (101 AFTR2d 2008-1612; “Tax Matters: The Code Trumps Tucker,” JofA, July 08, page 87) to note the Supreme Court recently underscored the “expansive reach” of the latter provision. In this case, the refund claim was filed approximately 10 years after RadioShack paid the taxes. Even claims for more recent tax years must be pursued within the limitations period, which means that for the estimated 94% of eligible corporate taxpayers who failed to claim a phone tax refund in tax year 2006, time is slipping away.
RadioShack v. U.S., 101 AFTR2d 2008-2350
By Alice A. Upshaw, CPA, MPA, instructor of accounting, and Darlene Pulliam, CPA, Ph.D., McCray Professor of Accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.