Attorneys Urge Clarification of Phone Tax Guidance

Dear Mr. Chairman:

As you recall, several months ago, you questioned Treasury Secretary Snow as to when the government would finally concede liability with respect to the federal communications excise tax ("FET") in light of all the judicial decisions rendered in favor of the taxpayer.

Although Treasury and the Internal Revenue Service (the "IRS") contend they have conceded defeat with respect to the FET, we respectfully submit that the concession is not complete and that IRS Notice 2006-50, which reflects the government's current FET position, is at odds in many respects with a real government concession.

Importantly, while the (improper) collection of FET over these many years drew no such distinction, Notice 2006-50 distinguishes between FET attributable to services billed before and after February 28, 2003. With respect to services billed after February 28, 2003, the IRS will not process previously filed FET refund claims. Instead, such refund claims must be reflected on a corporation's income tax return to be filed in 2007 or 2008 and these refund claims will potentially be subject to tax audit by the IRS for many years.

The unprecedented process set forth in Notice 2006-50 will undoubtedly reduce the aggregate amount of FET refunds issued by the IRS and it will delay issuance of the refunds as well. Although the rules described above may lessen the budget deficit in the short term (and we assume that is their underlying objective), they are inconsistent with a real government concession.

Our concern about delay and the extent of the so-called concession is heightened by the fact that IRS agents have expressed the view that there are many ambiguities with respect to the FET, even following the government's concession and issuance of Notice 2006-50. We anticipate that, in many cases where the FET refund is reflected on the corporate income tax return, an IRS agent would attempt to reduce the claimed FET refund anywhere from 10% to 30% of the amount claimed. Furthermore, in many cases, a taxpayer will forgo making the FET refund claim if it is required to reflect the refund claim on its corporate income tax return.

We respectfully submit that if, as reported, the IRS has conceded liability with respect to the FET, then it should enter into binding settlement agreements with respect to all outstanding FET refund claims, and such refund claims should not have to be reflected on a corporation's income tax return. Clearly, if the IRS has conceded, then it should issue FET refunds immediately with respect to previously filed FET refund claims. Pursuant to Notice 2006-50, FET refunds attributable to services billed after February 28, 2003 could be deferred for two years or more.

Taxpayers will be significantly disadvantaged as a result of the delay in issuance of the FET refunds. Although the IRS is (theoretically) obligated to pay interest with respect to the FET overpayment, we know, from practical experience, that in many cases, the IRS will not pay the correct amount of interest. During the past twelve years, we have secured partial refunds of the FET on behalf of approximately 200 public corporations, and in many cases, the IRS did not pay the correct amount of interest with respect to the FET refund (and in certain cases, we were never able to secure the proper amount of interest). If the IRS has underpaid interest with respect to FET refunds where the FET was addressed on a stand-alone basis, we have no doubt that this problem will be magnified where the FET refund claim is reflected instead on the corporate income tax return.

A true "concession" by the IRS is not only the proper course to take in light of the numerous court decisions establishing that the collection of FET was improper, but it is also mandated in light of the fact that during the past twelve years, the IRS has improperly collected FET proceeds of approximately $25 to $50 billion. By imposing the FET with respect to non-distance sensitive service, in contravention of the taxing statutes, the IRS has acted as a legislative body. We believe that, as far back as 1995, the IRS and Treasury recognized that a legislative amendment to the Internal Revenue Code was probably necessary in order to impose the FET with respect to non-distance sensitive service, but the IRS and Treasury also undoubtedly understood that a legislative amendment was unlikely because Congress was simultaneously considering a repeal of the FET. (In fact, during the Clinton Administration, Congress voted to repeal the FET, but President Clinton vetoed the repeal.)

In conclusion, it is important to recognize that the taxpayers are the rightful owners of the FET proceeds improperly collected by the IRS. If the government has truly conceded with respect to the FET, as reported, then we respectfully submit that the IRS should immediately disgorge improperly collected FET proceeds to their rightful owners, provided they have previously filed FET refund claims, and the IRS should be barred from attempting to recoup such proceeds at a later date.

Proper resolution of the FET controversy is important -- because it reaffirms the respective roles of Congress, the IRS and the judiciary and it demonstrates that the IRS cannot act in contravention of the Internal Revenue Code. Unfortunately, Notice 2006-50 only serves to irritate rather than salve the wound created by improper collection of FET. Sincerely yours,