TELECOM Digest OnLine - Sorted: The Front Lines - September 19, 2005

The Front Lines - September 19, 2005

Jonathan Marashlian (
Mon, 19 Sep 2005 16:08:08 -0400 The FRONT LINES

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 $6,000,000 refund claim.

2. 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.

3. 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.

4. 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:

The Helein Law Group
8180 Greensboro Drive, Suite 700
McLean, Virginia 22102

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