LB3 scores another win in the effort to recover Federal Excise Tax overpayments.
 
LB3 has now won two victories on behalf of enterprise customers seeking refunds of the 3% federal excise tax (“FET”) on intrastate, interstate, and international voice minutes. Although the IRS won the first case at the district court level, three later courts have rejected that court’s analysis and awarded summary judgment to the customers.

The FET on communications has been the bane of telecom users for decades. Under the Internal Revenue Code, in order to be taxable, long distance service must be charged based on both the "distance and elapsed transmission time" of each individual communication. However, the rates for modern long distance services are non-distance sensitive: carriers charge the same price for a call from New York City to Pittsburgh as they do for a call from New York City to Los Angeles.

Despite the plain language of the Internal Revenue Code, the IRS maintains that Congress intended to tax all long distance voice service even if the underlying rates are not distance sensitive.

The amount at stake is significant – recovering 3% of an enterprise's spend on intrastate, interstate, and international voice minutes going back three years can add up to millions of dollars for some companies. Moreover, filing these claims does not upset the telecom vendor (the carriers are merely collection agents for the IRS), and does not create a shortfall, since taxes are not contributory revenue for commitment purposes.

LB3 has challenged the legality of the IRS's position on behalf of a number of its large enterprise clients. The first step was filing refund claims with the IRS. Historically, the IRS denied such claims at the examination level. If the taxpayer sought review by IRS Appeals, the IRS would settle the claims for 30-40 cents on the dollar.

There are two drawbacks to such settlements. First, the taxpayer does not get a full refund of the excise taxes it paid. Second, they do not stop the government from continuing to collect the tax: after settling with the IRS, taxpayers still have to pay the tax and then file for refunds all over again.

When LB3 could not get the IRS agree to a more reasonable settlement, it filed refund lawsuits on behalf of several clients.

In late January 2004, a District Court in Florida ruled in favor of the Government in American Bankers Insurance Group, Inc. (“ABIG”) v. United States. The court found that the term “and” was ambiguous, and held that it should be interpreted to mean “and/or” in light of the legislative history and intent of the statute.

Just weeks later, however, the United States District Court for the Northern District of Ohio found for the taxpayer in OfficeMax, Inc. v. United States. The OfficeMax court had no difficulty discerning the plain meaning of the statute: “This Court respectfully disagrees with the conclusion of the ABIG court . . . . Although the present-day Congress might wish to tax long-distance service as it is currently charged (i.e., on the basis of elapsed transmission time only), this Court believes the relevant inquiry is what Congress intended when it amended the statute in 1965.”

On September 16, 2004, the U.S. District Court for the Southern District of New York joined the Northern District of Ohio when it issued an opinion and order in Fortis v. U.S. granting summary judgment in favor of the taxpayer (except for certain inbound calling types, where the court needed more information). After reviewing the ABIG and Office Max decisions, Judge Koeltl wrote:

This Court agrees with the Office Max court that the meaning of the provision is plain: the amount of toll charge must depend on both the distance and elapsed time of the call.” The court found no reason to set aside the plain meaning of the statutory language because “there is no language in [the statute] or its legislative history to support the Government’s claim that the overriding purpose of the statute was to tax all long-distance service in perpetuity.

The opinion noted: “The recent emergence of service that falls outside of the current definitions does not justify abandoning the statute’s plain and original meaning. Updating the statute is not the Court’s role, especially when doing so would require reading the term ‘distance’ out of the statute.”

Four days later, Judge Rosemary M. Collyer of the U.S. District Court for the District of Columbia handed the government another defeat in National Railroad Passenger Corporation (Amtrak) v. U.S, a case brought by another law firm.

ABIG has appealed the district court decision to the Eleventh Circuit. Briefing in the case has been completed and oral argument is scheduled for November. The Government has appealed the OfficeMax decision to the Sixth Circuit, and briefing should be complete by November. The Government is also expected to appeal Fortis and Amtrak.

As the other cases are decided by the district courts, additional appeals can be expected in the Second, Third, District of Columbia and Federal Circuits. If a significant number of these cases are decided in favor of the taxpayer, the Government may abandon its efforts to defend them and institute a policy of settling all pending claims on more favorable terms. Alternatively, given the revenue at stake the Government might attempt to carry the fight to the Supreme Court.

LB3, on behalf of its clients, is committed to litigating these cases through the Circuit Courts of Appeals and, if necessary, to the Supreme Court. We believe that the decisions in OfficeMax, Fortis and Amtrak confirm that the long distance services purchased by most large business users are not subject to the FET under a plain reading of the statute. While the ABIG court reached the opposite conclusion, we believe that decision will be reversed on appeal. 

For further information, please contact Hank Levine or Stephen Rosen.

Additional Information

LB3 scores first win in a nationwide effort to recover Federal Excise Tax overpayments.

Wrangling for a Refund
David Rohde and Stephen Rosen
Network World, 04/12/04

Is Federal Tax Relief Finally on the Way?
The Telecom Manager's
Voice Report Online, 03/08/04

Federal Excise Tax Refunds Could be Paid in Full
The Telecom Manager's
Voice Report, 10/06/03