Attorney Proposes Changes to Communications Excise Tax Guidance

While we commend Treasury and the Internal Revenue Service ("IRS") for conceding liability regarding the federal communications excise tax ("FET"), we respectfully submit that certain conditions incorporated in Notice 2006-50 are inconsistent with this highly publicized "concession," and that these conditions will prolong FET disputes for many years.

This submission is divided into three parts. Part I briefly summarizes the relevant provisions of Notice 2006-50. Part II proposes a change to Notice 2006-50. Part III discusses the underlying rationale for the proposed change.

I. Notice 2006-50

Notice 2006-50 distinguishes between FET attributable to services billed before and after February 28, 2003. With respect to services that were billed before March 1, 2003, FET refund claims will be settled on a case by case basis in the same manner in which FET refund claims have historically been settled, i.e., at the IRS examination level or at the IRS Appeals level. With respect to services billed after February 28, 2003, FET refund claims will not be processed by the IRS. Instead, such refund claims must be reflected on a corporation's "2006 corporate tax return," defined below.

In the case of a calendar year corporation, the "2006 corporate tax return" is the corporate income tax return for the calendar year 2006. In the case of a corporation with a fiscal year, the "2006 corporate tax return" is the corporate income tax return for the first taxable year including December 31, 2006.

Under Notice 2006-50, to the extent an FET refund claim is attributable to services billed after February 28, 2003, and thus reflected on the "2006 corporate tax return," the refund claim is subject to a potential IRS audit adjustment. In contrast, FET refund claims attributable to services billed before March 1, 2003 could be reflected in a binding settlement agreement. This would bar the IRS from subsequently reducing the settlement amount.

Notice 2006-50 states that corporate taxpayers will be instructed to retain records that substantiate the refund request and these records "should include bills from the collector that show the amount of tax charged for non-taxable services for each month during the relevant period and receipts, canceled checks or other evidence that the amount requested was actually paid." Notice 2006-50 further provides that "although the credit or refund allowed to a taxpayer under this notice will be requested on the taxpayer's income tax return," it is not a credit for purposes of Sections 6654 and 6655 of the Internal Revenue Code of 1986, as amended (the "Code"). Thus, a taxpayer may not take the FET credit or refund into account in determining its estimated tax obligations. It is unclear whether the FET refund reflected on the "2006 corporate tax return" will be allowable as a credit against the corporation's income tax liability.

II. Proposed Change to Notice 2006-50

We respectfully request that Notice 2006-50 be amended to authorize the IRS to enter into a single binding settlement agreement with a taxpayer with respect to all FET refund claims, regardless of whether the FET relates to services billed before or after March 1, 2003. In addition, settlement of FET refund claims should not be reflected on a corporate income tax return. Finally, we respectfully request that there be no artificial delay of FET refunds until late 2007 or 2008, which delay is seemingly contemplated by Notice 2006-50.

III. Rationale for Proposed Change

To illustrate, late last week, following the government concession, IRS agents continued to take the position that FET attributable to intraLATA and directory assistance service did not qualify for a refund. We are confident that we will rebut the IRS's argument in our case, but we also recognize that if an IRS agent were to raise these arguments in connection with a corporate income tax audit three or four years from now, most corporations would not have the inclination to aggressively rebut these arguments.

We respectfully submit that if the government has, in fact, conceded with respect to the FET, then it should authorize the IRS to enter into a binding settlement agreement with respect to all FET refund claims.

Moreover, in view of the government's concession, we respectfully submit that it is inappropriate for the government to defer payment of the FET refunds. Pursuant to Notice 2006-50, FET refunds attributable to services billed after February 28, 2003 could be deferred for two years or more.

We respectfully submit that the IRS cannot retroactively vitiate properly filed FET refund claims. We are confident that the courts will allow lawsuits for FET refund claims filed attributable to services billed after February 28, 2003, even if the refund claims are not reflected on the "2006 corporate tax return."

It is ironic and paradoxical that the government has conceded liability with respect to the FET, and thus, has implicitly acknowledged that it imposed the FET in contravention of the statutory provisions of the Code, but in conceding liability, the government has simultaneously abrogated properly filed FET refund claims, also in contravention of the Code.

It is also important to recognize that the FET and the corporate income tax are two separate taxes and the obligation to reflect the FET refund claim on the corporate income return will undoubtedly give rise to significant tax complexities.

For example, to the extent FET refund claims are reflected on the "2006 corporate tax return," we believe that, in many cases, interest would be underpaid with respect to the FET overpayment. We have succeeded in securing FET refunds for many corporations during the past eleven years, and in a significant number of cases, the IRS has underpaid interest with respect to the FET refund. If interest is underpaid where FET is addressed on a stand-alone basis, we believe this problem would be magnified where FET refunds are reflected instead on the corporate income tax return.