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

Chalk up a win for telecom managers: the IRS has finally been sued over LD excise taxes (VR 10/6/03), netting one Ohio-based company more than $380,000, and the lawyers who beat the government say there could be money in it for you, too.

Granted, the refund isn’t a slam dunk—we’ll tell you why not in a moment. But Hank Levine, one of the lead attorneys on the case, says you have nothing to lose by trying: all you have to do is complete and mail two simple forms every three months.

“You’d be a negligent telecom manager not to file,” says Levine, a partner at Washington, D.C. law firm Levine, Blaszak, Block & Booth. “It would be silly not to. If you win, great—you’ve done something good for your company. And if you don’t, it’s no loss.”
 
How One Company Recovered $380,000 from Uncle Sam

The hubbub centers on sections 4251 and 4252 of the Internal Revenue Code, which impose a 3% tax on LD service, defined as “a telephonic quality 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).

Since the Code specifies that both distance and time must figure into the rate calculation in order for the tax to apply, and since most carriers charge only by the minute, companies have long protested that the tax is improperly levied. The IRS, for its part, has been known to accept most refund requests, paying out 30¢ to 39¢ on the dollar, according to Steve Rosen, another partner at Levine, Blaszak, Block & Booth. But companies that seek a full refund have mostly been stonewalled.

Last May, OfficeMax, the Shaker Heights, Ohio-based retailer, decided to take a stand. The company had earlier filed for a $380,296.72 refund, arguing that MCI WorldCom calculated its rates only on the basis of call length (as most carriers began to do in the late 1990s). Fourteen months later, with no refund in sight, OfficeMax filed suit.

At trial, the IRS mounted a multi-part defense that included, among other things, the arguments that the word “distance” was ambiguous, that a rate that varies by political jurisdiction is in effect a rate that varies by distance, and that, most importantly, the IRS’ general intent is simply to tax LD service, regardless of the technicalities by which LD service is defined.

Ultimately, though, Judge Patricia Gaughan of the Ohio District Court ruled in favor of OfficeMax, writing that, “when Congress wrote the phrase ‘distance and elapsed transmission time,’ it meant for the word ‘and’ to be read conjunctively to mean that a charge must vary by both distance and elapsed transmission time, and not by one or the other.” The IRS was ordered to reimburse OfficeMax for the full amount.

“So maybe the emperor really has no clothes,” says Rosen. “The fact that the IRS has been settling these [cases] for 15 years at 30 to 39% indicates that they don’t have a high degree of confidence in the rule.”

Voice Pros: “We’ll Go After It”

Telecom managers contacted by Voice Report expressed both surprise at the news and a willingness to initiate their own refund filings.

“If [the tax] is really being improperly applied, we’ll go after it,” says Clay Armstrong, telecom head at the Watch Tower Bible and Tract Society in Brooklyn, N.Y. “In this day and age, you’ve got to make every dollar count. You’ve got to show your value to your supervisors.” (For instructions and advice on filing for a refund, see the sidebar on this page.)

Within six months of your original filing, you can launch a lawsuit against the IRS. Levine notes that many lawyers will take on this work on a contingency basis, meaning you won’t be out of pocket if you don’t win. But most observers say you can save yourself the time and trouble of going to court by simply continuing to file refund requests and waiting for the smoke to clear: the IRS is expected to appeal the OfficeMax decision, and eight other related cases are pending.

“We don’t all have to run out and fight the same battle,” says John Parker, OfficeMax’ local counsel in Shaker Heights. Levine agrees: “File your claims every three months, and when this thing gets decided, you’ll get a check,” he says. “That’s a good strategy for companies that don’t want to be the lead dog, but still want to preserve their rights.”

What You Need to Consider

Be warned, though, that the IRS won’t give up without a fight. Parker says that if the OfficeMax decision is appealed, the Sixth Circuit would make a ruling that would become binding law in the Circuit (which consists of Ohio, Michigan, Kentucky and Tennessee). But as Eric Smith, an IRS spokesperson in St. Paul, Minn., points out, the OfficeMax decision wouldn’t establish a national precedent—only the Supreme Court can do that.

IRS Schedule 6
IRS Schedule 6, the excise tax refund form.
In the meantime, “[the IRS] will continue to hold the position we took in the [Ohio] case,” Smith says, adding that “it’s a long process for the IRS to determine whether its position is wrong, or at least no longer right.” And even if the statute is struck down, Congress can always redraft another statute to recapture the tax.

How long would that take? “Anywhere from two weeks to 20 years,” says Levine. “There’s no telling.” (Levine adds that even if Congress amended the statute, any tax paid until the change is made would still be refundable.)

Too, the IRS won the only other decision rendered under section 4251. In that case, in Florida District Court, American Bankers Insurance Group (ABIG) sued for $361,763 in excise tax. The judge ruled that ABIG was merely seeking to exploit a technicality: since Congress’ intent was clearly to tax all LD service, the money should not be refunded.

To Rosen—whose firm also represented ABIG—the difference between the Florida decision and the OfficeMax decision is simple: different judges, with different approaches to the legal questions being posed.

“The [Florida] judge’s theory was, ‘We know perfectly well that Congress meant to tax long-distance service, so now we’ve just got to prove it’,” Rosen says. “But tax statutes aren’t civil rights statutes. They’re not things that are out there to help people. They’re hard and fast rules, and they’re supposed to be interpreted according to their plain meaning.”

His colleague Levine agrees. “Maybe it is just a semantic issue, but that’s not the way statutes work,” he explains. “Unless it’s truly insane, the courts have to do what Congress said. Otherwise, the mischief would be amazing. And in this case, it isn’t truly insane at all.”


Filing for an IRS Refund in 5 Steps

Submitting a refund request is easy enough—no lawyer required. Here’s a five-step process:

1. Gather your phone bills for the last three years. A statute of limitations bars you from recouping taxes paid more than three years ago. But once you put in a claim for a refund, that money is locked in, and you can continue to make additional claims.

2. Add up the taxes paid on non-distance-sensitive intrastate, interstate and international service. Note that only voice service qualifies under the statute. Private-line service (which isn’t taxed anyway, according to Levine) doesn’t count. If you happen to be missing a bill for a particular month, take an average of all the months you do have and substitute that figure, advises Karen Thatcher, a consultant with TelCon Associates in Overland Park, Kan.

Bear in mind: calls to Mexico generally are distance-sensitive and thus are subject to the tax, according to Steve Shea of Washington, D.C.-based consulting firm TechCaliber. That’s not generally the case with other international calls.

You can’t recoup taxes paid on bundled, “all-you-can-eat”-type LD services, either. Shea says those services are covered by section 4252 of the Code, which specifies that “a service which entitles the subscriber…to the privilege of an unlimited number oftelephonic communications” is taxable.

3. Fill out IRS Form 8849 and Schedule 6. Form 8849 is online at www.irs.gov/pub/ irs-pdf/f8849.pdf. Under the “Schedules Attached” section, check the box labeled “Schedule 6: Other Claims”. On Schedule 6, at www.irs.gov/pub/ irs-pdf/f8849s6.pdf, you’ll list the amount of your refund.

Next, mail both documents to the Internal Revenue Service, Cincinnati, Ohio, 45999-0002. Be sure to fill out a separate set of forms for each employer identification number at your firm, and include your name and your company’s employer identification number on each sheet.

4. Follow up with your state’s excise tax department. Brenda Shald, an attorney in Worthington, Minn., who successfully got a 100% tax refund for a hospital in her state, says she didn’t get far when she tried to check on the status of her case with the main IRS office in Washington, D.C. “So go through the state office,” she advises. “They’re more accountable. They have names; they can’t hide.” The same is true of your local representative, says Thatcher.

5. If the IRS offers you a partial settlement, denies your claim or ignores you, just keep filing. There’s no telling what the IRS will do in any particular case (although Levine says most submissions end up getting ignored). If you get any response other than a full refund, keep mailing a new Form 8849 and Schedule 6 every three months.