IRS Loses Appeal Over 3% Excise Tax on Communications

May 10, 2005. The U.S. Court of Appeals (11thCir) issued its opinion [22 pages in PDF] in AIBG v. US, holding that certain telephone services purchased by the American Bankers Insurance Group (AIBG) from AT&T are not subject to the excise tax on communications.

26 U.S.C. 4251 imposes a 3 percent excise tax on certain communications services. This tax is sometimes referred to by its detractors as the "Spanish American War tax", since it was originally imposed to help fund that war. 26 U.S.C. 4252 contains the applicable definitions. This case involves interpretation of these definitions.

The statute relied upon by AT&T and the IRS in taxing AIBG references "a toll charge which varies in amount with the distance and elapsed transmission time". But, the charges for the services purchased by AIBG were uniform; they did not vary by distance. They did vary by elapsed time.

The IRS took the position that the word "and" really means "or", and hence, a charge that does not vary with distance, but that does vary with elapsed time, is covered and taxable.

The Court of Appeals recited the pertinent facts. "Between October 1, 1998, and March 31, 2002, taxpayer, ABIG, purchased interstate, international, and (in five states) intrastate long distance service from AT&T. ABIG paid a uniform toll rate for all interstate calls made within the United States, uniform toll rates for all intrastate long distance calls made within the five states in which it purchased service, and toll rates for international calls (other than calls to and from Mexico) that varied only according to which country the calls were being placed."

AT&T collected from AIBG federal excise taxes on these services pursuant to 26 U.S.C. 4252(b)(1) and then gave the money to the Internal Revenue Service (IRS).

AIBG filed refund claims with the IRS. The IRS ignored these refund claims.

AIBG then filed a complaint in U.S. District Court (SDFl) seeking a refund of its money. The District Court granted summary judgment to the IRS. AIBG appealed. The Court of Appeals reversed, and directed the District Court to enter judgment for AIBG.

4251 imposes a tax on certain "communications services".  4251(b) provides that the term ''communications services'' means "(A) local telephone service; (B) toll telephone service; and (C) teletypewriter exchange service". This case concerns "toll telephone service".

26 U.S.C. 4252(b) provides that "toll telephone service" means

"(1) a telephonic quality communication for which
   (A) there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication and
   (B) the charge is paid within the United States, and
(2) a service which entitles the subscriber, upon payment of a periodic charge (determined as a flat amount or upon the basis of total elapsed transmission time), to the privilege of an unlimited number of telephonic communications to or from all or a substantial portion of the persons having telephone or radio telephone stations in a specified area which is outside the local telephone system area in which the station provided with this service is located."

The District Court reasoned that the tax on toll telephone service could be imposed on services where charges vary by distance or by elapsed transmission time. That is, the District Court substituted the word "or" for the statute's word "and".

The Court of Appeals reasoned that the word "and" means "and", not "or". It held that the meaning of the word "and" is not ambiguous. Therefore, it held that the District Court erred.

On appeal, the IRS also tried to fit its collection of the tax under 4252(b)(2) or 4252(a). The Court of Appeals rejected these arguments.

This case is American Bankers Insurance Group v. U.S.A., U.S. Court of Appeals for the 11th Circuit, No. 04-10720, an appeal from the U.S. District Court for the Southern District of Florida, D.C. No. 03-21822 CV-PCH

The IRS has also demonstrated an interest in expanding the excise tax, by administrative fiat, to certain information services. See, story titled "IRS Publishes Advance NPRM Regarding Expanding the Excise Tax on Telephones to Include New Technologies" in in TLJ Daily E-Mail Alert No. 931, July 6, 2004.

It would appear that a court applying a strict statutory construction of 26 U.S.C. 4251, et seq., as in the present case, would overturn any such IRS rules or rulings.

Meanwhile, on April 27, 2005, Rep. Gary Miller (R-CA), and 39 other Representatives, introduced HR 1898, the "Telephone Excise Tax Repeal Act of 2005". See, story titled "Rep. Miller Introduces Bill to Repeal Excise Tax on Phones" in TLJ Daily E-Mail Alert No. 1,128, May 4, 2005.