The Front Lines - September 19, 2005

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Advancing The Cause of Competition in the Telecommunications Industry


The Wireline Competition Bureau of the FCC announced that the Universal Service Fund contribution factor for the Fourth Quarter of

2005 will remain at the current 10.2% applicable to the Third Quarter. The proposed 10.2% contribution factor will become effective unless the FCC takes action in response to the proposed increase, which is not anticipated.

Contributors are reminded that they may not mark up federal universal service line-item amounts above the contribution factor. Thus, contributors may not, during the fourth quarter of 2005, recover from end users through a federal universal service line item an amount that exceeds the interstate telecommunications charges on a customer's bill times 10.2%.


On September 16, 2005, the Federal Communications Commission ("FCC") quietly took action on a Forbearance Petition filed by Qwest Corporation ("Qwest") which is certain to have profound implications for the future of ILEC network unbundling.

The FCC granted a Qwest Forbearance Petition in which Qwest requested relief from Section 251 obligations that apply to it as the ILEC in the Omaha-Council Bluffs, NE-IA Metropolitan Statistical Area ("Omaha MSA"). The FCC granted the Forbearance Petition because the particular market characteristics of the Omaha MSA, including the substantial infrastructure investment made by Cox Communications, supported the request to be relieved from legacy monopoly regulations.

With regard to section 251(c)(3) unbundling obligations for transmission facilities, the FCC granted Qwest relief in targeted areas where intermodal deployment is extensive. Specifically, the FCC relieved Qwest of the obligation to provide unbundled network elements (UNEs) to competitors in 9 of Qwest's 24 wire center service areas in the Omaha MSA. The FCC left in place other section 251(c) requirements, such as interconnection and interconnection-related collocation obligations, as well as section 271 obligations to provide wholesale access to local loops, local transport, and local switching at "just and reasonable" prices.

For mass market telephone services, the Commission granted Qwest relief from dominant carrier regulations that apply to it in the entire Omaha MSA. Specifically, the FCC granted Qwest's request to forbear from applying price cap, rate of return, 15-day tariffing, and

60-day discontinuance regulations to Qwest for its provision of interstate mass market exchange access services and broadband Internet access services.

The Commission adopted a six-month transition period to permit competing carriers that currently use UNEs in the 9 wire centers receiving relief to migrate existing customers to alternative facilities or arrangements, including self-provided facilities, alternative facilities offered by other competitive carriers, or services offered by Qwest.

The FCC's grant of Qwest's Forbearance Petition is likely to spawn similar filings by RBOCs seeking similar relief in various markets across the U.S.


In the July 28, 2005, edition of The Front Lines, we advised readers of the opportunity to obtain refunds of federal excise taxes paid to the Internal Revenue Service ("IRS") for certain toll telecommunications services. The following is an update on the status of the IRS' responses to the series of court cases that have held that the toll telephone excise tax does not apply to long distance services that are not based on distance.

  1. On August 5, 2005, the IRS lost its 8th straight court case, this decision based on summary judgment by the U.S. District Court for the Northern District of California for a ,000,000 refund claim.

  1. According to information culled from earlier cases decided in favor of taxpayers, the IRS has settled and made refunds for 100 cents on the dollar, plus interest.

  2. The IRS has, however, recently reasserted its policy of suspending other refund claims; meaning that it will not act on un-litigated claims until the court cases that remain on appeal are decided. The IRS' strategy being to stonewall large refund claims in hopes of winning one case on appeal and creating a conflict at the Appellate court level, thus setting the stage for Supreme Court review. All intended to further delay its issuing refunds.

  1. There are currently four cases on appeal, three before the United States Court of Appeals for the D.C. Circuit and one in the 6th Circuit sitting in Ohio.


Contrary to indications made shortly after the United States Court of Appeals for the 11th Circuit joined 6 other lower federal courts in holding that the 3% federal excise tax does not apply to toll telephone services the charges for which are not based on distance, IRS has decided to reinstitute its policy of suspension of all FET refund claims until (1) other court cases or appeals are decided or (2) until Congress does something. No timetable exists for how long the IRS will wait for these court cases or appeals to be decided or for Congress to address the issue with legislation.

IRS also claims to have heard "rumors" that Congress may repeal the FET altogether, or may try and solve the problem by some form of compromise based on the timing of FET payments or some other criteria. We are not giving much credence to the "rumors" about Congress becoming involved. In our opinion, unless the IRS's hand is forced, it will continue to stonewall dealing with the issue for as long as possible because it knows that the court cases and their appeals could take another two to five years or longer to be decided.

The IRS's position is indefensible. Eight courts out of eight have now ruled in favor of taxpayers.

The most recent case lost by the IRS is an August 5, 2005 decision out of the Northern District of California where the court disposed of the case, in favor of the taxpayer Hewlett-Packard, at the summary judgment stage. Notably, the refund at stake was the largest one yet litigated -- over $6 million.

Presently, there are four appeals pending before the United States Court of Appeals:

  • National R.R. Passenger Corp. (Amtrak) v. United States.. Amtrak filed its brief on June 1, 2005; there is no information on whether or not oral argument has been scheduled yet.

  • AOL v. United States. IRS filed its appeal with the D.C. Circuit on June 27, 2005.

  • Honeywell International v. United States. IRS filed its appeal with the D.C. Circuit on July 12, 2005.

  • Office Max v. United States. Appeal pending before the 6th Circuit sitting in Ohio.

We fully expect the appeals before the D.C. Circuit and the 6th Circuit to have the same pro-taxpayer outcome as in the May 2005 decision by the 11th Circuit. The bases for the pro-taxpayer rulings are matters of applying basic principles of statutory construction and the lack of IRS authority to change the statutory provision by its own decisions or interpretations. In other words, these cases do not present a "close question" on which reasonable minds could differ as to the result. The result reached, now by eight courts, in favor of taxpayers is unquestionably the right one in our opinion. The recent decision in California decided on summary judgment and for an amount of over $6 million supports our optimism.

The IRS' position is unfortunate and can be challenged. For example, once a United States Court of Appeals denies IRS's appeal, as was done for the first time in May of this year by the 11th Circuit, and the IRS fails to seek review by the Supreme Court, the ruling in favor of the taxpayer becomes "the law" of that Circuit. Such is the case in the 11th Circuit. In short, the toll telephone excise tax does not apply any longer in the three states that are located in the 11th Circuit -- Alabama, Georgia and Florida.

For both carriers and customers in these states, IRS's stonewalling through its suspension policy is untenable. Carriers have no legal basis to bill and collect the excise tax any longer in these three states and open themselves up to suits if they continue to bill and collect the taxes from their customers. Customers, unaware of the law, would surely continue to pay the excise tax if billed for it.

Hence, in the 11th Circuit, it is now possible to explore the use of the doctrine of mandamus to force the IRS to do that which the law requires as decided by the 11th Circuit. The mandamus doctrine permits courts to issue orders instructing the IRS to conduct itself (e.g., make refunds) in accordance with law. When an agency is required by law to do something that is not discretionary, it may be compelled by court order (mandamus) to do it. Taxpayers in the 11th Circuit therefore are in position to seek mandamus against the IRS.


If you seek professional advice regarding the application of FET to your business, we advise you to contact your legal counsel. If you do not have legal counsel or seek specific counsel on this issue, please contact Charles H. Helein at 703-714-1301 or by e-mail: Our firm has developed various strategies in response to the legal developments affecting the FET and looks forward to working with clients to implement the most appropriate strategy given each client's unique circumstances.


The Front Lines is a free publication of The Helein Law Group, providing clients and interested parties with valuable information, news, and updates regarding regulatory and legal developments primarily impacting companies engaged in the competitive telecommunications industry.

The Front Lines does not purport to offer legal advice nor does it establish a lawyer-client relationship with the reader. If you have questions about a particular article, general concerns, or wish to seek legal counsel regarding a specific regulatory or legal matter affecting your company, please contact our firm at 703-714-1313 or visit our website:

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The Helein Law Group

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Jonathan Marashlian
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