449 B.R. 655
Bankr. S.D.N.Y.2011Background
- Debtors purchased COBRA service from Local Exchange Carriers (LECs) to provide high‑speed data streams retaining telecommunication pathways.
- COBRA equipment (including DSP cards and NAS) remained with LECs; Debtors had no physical access and only remote electronic access to disable malfunctions or apply limited software changes.
- Data stream from COBRA could not provide telephonic quality communication; Debtors could not obtain dial tone or connect PBX/telephone equipment to the stream.
- PRI lines and NAS DSP cards could enable telephonic quality communication up to the NAS; however, configuration to PBX or VoIP gateway required renegotiation and access not granted by COBRA contracts.
- Debtors paid on a bundled per-port basis; pricing did not vary with voice content, volumes, or egress circuits, and did not contemplate VoIP unless renegotiated; IRS asserted excise tax under 26 U.S.C. § 4251 et seq. (telecommunications excise tax).
- District Court remanded for factual determinations about (i) whether COBRA afforded access to a local telephone system and telephonic quality communication, and (ii) whether VoIP could be transmitted under COBRA.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COBRA service constituted local telephone service with telephonic quality communication. | WorldCom argued COBRA did not provide such access. | IRS argued COBRA could be construed as local telephone service. | COBRA not local telephone service; no telephonic quality communication delivered. |
| Whether VoIP capabilities could render COBRA a local telephone service. | Debtors contended possible VoIP use under COBRA; renegotiation not required for hypothetical configurations. | VoIP capabilities not purchased; renegotiation required; not present. | VoIP capability not purchased; not a basis for telephonic quality determination. |
| Whether the Debtors’ refunds for excise tax should be granted under §505(a)(1). | Debtors sought refund for excise tax paid on COBRA. | IRS opposed refunds. | Refund granted; COBRA not subject to §4251 excise tax as configured. |
Key Cases Cited
- USA Choice Internet Services, LLC v. United States, 522 F.3d 1332 (Fed. Cir. 2008) (telephonic quality communication defined; local telephone service requires such capability)
- USA Choice Internet Service, LLC v. United States, 73 Fed.Cl. 780 (Fed. Cl. 2006) (relevant district/federal court interpretation guiding determination (non-official reporter))
- Comdata Network, Inc. v. United States, 21 Cl.Ct. 128 (Ct. Cl. 1990) (data streams that reach taxpayers capable of telephonic quality communication)
- WorldCom, Inc., 371 B.R. 19 (Bankr. S.D.N.Y. 2007) (initial ruling granting objections and refund motion (WorldCom I))
- Comcation, 78 Fed.Cl. 65 (Fed. Cl. 1990s) (distinguishing inherent versus self-imposed limitations under §4252(a))