723 F.3d 346
2d Cir.2013Background
- WorldCom purchased COBRA from local telephone companies to connect dial-up subscribers to the Internet over PSTN lines.
- The Internal Revenue Code imposes a 3% excise tax on local telephone service under 26 U.S.C. §4251.
- Local telephone service is defined as access to a local telephone system and the privilege of telephonic quality communication with substantially all persons within that system ( §4252(a)).
- COBRA involved PRI lines and network access servers enabling two-way connections between dial-up users and WorldCom’s network and ISPs; the service was provided by local telephone companies.
- Bankruptcy and district courts initially treated COBRA as non-taxable; on appeal, the court held COBRA provides local telephone service and must bear the federal excise tax, reversing the district court and remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COBRA is a local telephone service under §4252(a). | IRS contends COBRA fits local telephone service. | WorldCom argues COBRA is not a local telephone service. | Yes; COBRA is a local telephone service. |
| Whether COBRA provides the privilege of telephonic quality communication with substantially all persons. | IRS says COBRA connects dial-up users to WorldCom’s network via telephonic lines. | Debtors say COBRA only provides data stream access, not telephonic quality communication. | Yes; COBRA provides telephonic quality communication. |
| Whether revenue ruling 79-245 controls or warrants deference in determining taxability. | IRS relies on ruling to deny taxability. | IRS rulings should be given little deference post-Mead; ruling not persuasive. | Ruling not persuasive; no Chevron deference; non-controlled by ruling. |
| Whether COBRA constitutes a private communications service under §4252(d). | WorldCom could argue exclusive channel use; COBRA separate from local service. | COBRA is not a separate private communications service beyond local telephone service. | No; COBRA is not exempt as a private communications service. |
| Whether the service must maintain telephonic quality throughout the entire connection to be taxable. | Taxable if part of the system provides telephonic quality communication. | Debtors argue only the data stream at a point was used. | Taxable; the service as a whole provides telephonic quality communication. |
Key Cases Cited
- USA Choice Internet Servs., LLC v. United States (USA Choice II), 522 F.3d 1332 (Fed. Cir. 2008) (defines telephonic quality and direct connectivity concepts; governs interpretation here)
- Comcation, Inc. v. United States, 78 Fed. Cl. 61 (Fed. Cl. 2007) (telephonic quality communication via ALT lines; supports taxation)
- Trans-Lux Corp. v. United States, 696 F.2d 963 (Fed. Cir. 1982) (context for statutory interpretation of access/connection to a system)
- OfficeMax, Inc. v. United States, 428 F.3d 583 (6th Cir. 2005) (statutory construction of local vs toll service; contextual guidance)
- American Bankers Ins. Grp. v. United States, 408 F.3d 1328 (11th Cir. 2005) (limits of taxing beyond evolving technology; statutory purpose)