United States: Rapid Changes to U.S. Excise Taxes on Long-Distance Telephone Services

Two recent court decisions regarding the federal excise tax paid on long-distance telephone service may affect large corporations. Most large corporations, with the assistance of the Big Four accounting firms or telecommunications consulting firms, have filed claims with the Internal Revenue Service (IRS) seeking a federal excise tax refund. In January 2004, two U.S. district courts reached opposite holdings on the issue. The U.S. District Court for the Southern District of Florida ruled that the taxpayer, the American Bankers Insurance Group, was not entitled to a refund of the tax, while the U.S. District Court for the Northern District of Ohio ruled that OfficeMax was entitled to a tax refund. At least seven other similar cases are pending.

For the past several years, the IRS’s Office of Appeals has been settling these claims administratively, typically conceding to the taxpayer 25 to 35 percent of the amount in issue. However, the window for obtaining a settlement is closing. The U.S. Department of Justice, which represents the IRS in all of the pending suits, has recently informed MWE that it is not compromising any of the cases; it will litigate these cases to a final judgment. Similarly, MWE was informed that the IRS’s examination function, which initially reviews all administrative claims, is no longer forwarding these claims to the IRS’s Office of Appeals for settlement. Instead, the claims are placed in suspense pending resolution of the litigation. For claims already pending before the Office of Appeals, the IRS will continue to reach settlements as they have in the past, at least until another court ruling tips the balance.

Taxpayers who have claims pending before IRS Appeals and wish to reach a compromise of the claim should expeditiously pursue the point with IRS Appeals because the opportunity to settle could be lost at any time. Conversely, taxpayers who do not wish to compromise their claims in the range offered and do not wish to place their fate in the hands of other taxpayers litigating the issue should consider promptly filing their own suit. It is possible that some taxpayers litigating the issue will receive refunds while others litigating in another court will not.