In recent months, several Federal circuit courts of appeal and district courts have rejected the imposition of the Section 4251 excise tax to flat-rate charges for long-distance telephone services. In light of the mounting judicial opposition, Treasury Secretary Snow acknowledged last month that another Government loss at the circuit level could signal a reverse of Treasury’s position in support of the application of the tax. Secretary Snow made these remarks during a February 15 hearing on Capitol Hill regarding the fiscal 2007 budget proposal. The IRS has indicated its intent to continue collection of the tax. See IRS Notice regarding continued collection of tax at http://www.irs.gov/pub/irs-drop/n-05-79.pdf.
The day of reckoning for Treasury may come soon as there are several cases pending at the circuit level. In January 2006, the Third Circuit heard arguments in Reese Brothers Inc. v. U.S. Similar refund actions are currently awaiting argument in the Second, Ninth and Federal Circuits.
Although the outcome is not certain, it is likely that the Government will continue to lose these cases. Businesses paying substantial excise taxes on their flat-rate long-distance services (which would have been collected by their long-distance service provider as a separately stated charge, rather than paid directly by such businesses) should consider filing protective refund claims pending the outcome of these cases. While there is some debate as to the applicable statute of limitations governing such refund claims, the IRS has taken the position that Section 6511 applies. See Rev. Rul. 60-58, 1960-1 C.B. 638. Section 6511 requires a claim for refund to be filed by the taxpayer within 3 years after the filing of the relevant tax return (in this case, the quarterly returns filed by the telecommunications company that collected the tax). Accordingly, before April 30, 2006, a claim for refund should be timely filed for all quarters ending in 2003 and later. To the extent possible, businesses should determine the amount of excise tax paid during the quarters for which a refund is sought. Alternatively, the refund claim should contain an estimated amount of excise taxes paid with a notation that the amount is an estimate and subject to change.