Communications Excise Tax; Toll Telephone Service

Part III. Administrative, Procedural, and Miscellaneous
Communications Excise Tax;
Toll Telephone Service
Notice 2006–50
SECTION 1. PURPOSE
(a) In general. As further described in
this notice, the Internal Revenue Service
will follow the holdings of Am. Bankers
Ins. Group v. United States, 408 F.3d
1328 (11th Cir. 2005) (ABIG); OfficeMax,
Inc. v. United States, 428 F.3d 583 (6th
Cir. 2005); Nat’l R.R. Passenger Corp.
v. United States, 431 F.3d 374 (D.C. Cir.
2005) (Amtrak); Fortis v. United States,
2006 U.S. App. LEXIS 10749 (2d Cir.
Apr. 27, 2006); and Reese Bros. v. United
States, 2006 U.S. App. LEXIS 11468 (3d
Cir. May 9, 2006). These cases hold that a
telephonic communication for which there
is a toll charge that varies with elapsed
transmission time and not distance (timeonly service) is not taxable toll telephone
service as defined in § 4252(b)(1) of the Internal Revenue Code. As a result, amounts
paid for time-only service are not subject
to the tax imposed by § 4251. Accordingly,
the government will no longer litigate this
issue and Notice 2005–79, 2005–46 I.R.B.
952, which states otherwise, is revoked.
(b) Credits and refunds. Taxpayers may
be entitled to request credit or refund of
the excise taxes paid for the services covered by this notice. This notice provides
guidance regarding these requests. In addition, the Commissioner will authorize
the scheduling of an overassessment under § 6407 to keep the period of limitations
open for these requests. This overassessment will apply to all taxpayers and to all
taxes paid for the services covered by this
notice beginning with the tax paid on services that were billed to customers after
February 28, 2003.
SECTION 2. BACKGROUND
(a) In general—(1) Tax imposed. Section 4251(a)(1) imposes a tax on amounts
paid for communications services.
(2) Payment of tax. Section 4251(a)(2)
provides that the tax imposed shall be
paid by the person paying for the service
(taxpayer). Section 4251(b)(2) provides
that the applicable percentage is 3 percent

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of amounts paid for communications services.
(3) Collection of tax. Section 4291 provides that the tax is collected by the person
receiving the payment (collector). In most
cases, the collector, which is also responsible for paying over the tax to the government, is the telecommunications company
that provides the communications services
to the taxpayer.
(b) Definitions—(1) Communications
services. Section 4251(b)(1) provides
that the term communications services
means (A) local telephone service; (B) toll
telephone service; and (C) teletypewriter
exchange service. This notice does not
address teletypewriter exchange service.
(2) Local telephone service. Section
4252(a) provides that local telephone service means (1) the access to a local telephone system, and the privilege of telephonic quality communication with substantially all persons having telephone or
radio telephone stations constituting a part
of such local telephone system; and (2)
any facility or service provided in connection with such a service. Local telephone
service does not include any service that
is a toll telephone service as defined in
§ 4252(b) or a private communications service as defined in § 4252(d). This notice
does not address private communications
service.
(3) Toll telephone service—(i) Time and
distance. Section 4252(b)(1) provides that
toll telephone service includes a telephonic
quality communication for which there is
a toll charge that varies in amount with
the distance and elapsed transmission time
of each individual communication and for
which the charge is paid within the United
States.
(ii) Periodic charge for a specified
area. Section 4252(b)(2) provides that
toll telephone service also includes a service which entitles the subscriber, upon
payment of a periodic charge (determined
as a flat amount or upon the basis of total
elapsed transmission time), to the privilege
of an unlimited number of telephonic communications to or from all or a substantial
portion of the persons having telephone
or radio telephone stations in a specified
area which is outside the local telephone

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system area in which the station provided
with this service is located.
(c) Rev. Rul. 79–404. Rev. Rul.
79–404, 1979–2 C.B. 382, concludes that
a long distance telephone call for which
the charge varies with elapsed transmission time but not with distance is toll telephone service described in § 4252(b)(1).
(d) Notice of proposed rulemaking.
In a notice of proposed rulemaking
(REG–141097–02, 2003–1 C.B. 807 [68
FR 15690]; April 1, 2003), the Service
proposed an amendment to the Facilities
and Services Excise Taxes Regulations
to provide that toll telephone service described in section 4252(b)(1) may include
a communication service for which the
charge does not vary with the distance of
each individual communication.
(e) Recent litigation. ABIG, OfficeMax,
Amtrak, and Reese Bros. hold time-only
service is not toll telephone service as
defined in § 4252(b)(1). Further, ABIG,
OfficeMax, and Reese Bros. hold that the
communications service provided was not
a service described in § 4252(b)(2) because the end result was not a “periodic
charge” based on total elapsed time but
rather a monthly bill based on a summation
of toll charges for individual communications. (In Amtrak, toll telephone service
described in § 4252(b)(2) would have been
exempt from tax under the common carrier
exception in § 4253(f).) ABIG, OfficeMax,
Amtrak, and Reese Bros. also hold that the
communications services provided were
not local service, notwithstanding the access the services provided to the local
telephone system. (Fortis affirms, in a per
curiam opinion, a district court decision
reaching the same results.)
(f) Notice 2005–79. Notice 2005–79,
2005–46 I.R.B. 952, states that the Service
will continue to assess and collect the tax
imposed by § 4251 on all taxable communications services, including those similar
to the services in ABIG.
SECTION 3. TERMS DEFINED
The following terms are defined solely
for purposes of this notice:
(a) Bundled service. Bundled service
is local and long distance service provided under a plan that does not separately
state the charge for the local telephone

June 19, 2006

service. Bundled service includes, for
example, Voice over Internet Protocol service, prepaid telephone cards, and plans
that provide both local and long distance
service for either a flat monthly fee or a
charge that varies with the elapsed transmission time for which the service is used.
Telecommunications companies provide
bundled service for both landline and
wireless (cellular) service.
(b) Local-only service. Local-only service is local telephone service, as defined
in § 4252(a), provided under a plan that
does not include long distance telephone
service or that separately states the charge
for local service on its bill to customers.
The term also includes services and facilities provided in connection with service
described in the preceding sentence even
though these services and facilities may
also be used with long distance service.
See, for example, Rev. Rul. 72–537,
1972–2 C.B. 574 (telephone amplifier);
Rev. Rul. 73–171, 1973–1 C.B. 445 (automatic call distributing equipment); and
Rev. Rul. 73–269, 1973–1 C.B. 444 (special telephone).
(c) Long distance service. Long distance service is telephonic quality communication with persons whose telephones
are outside the local telephone system of
the caller.
(d) Nontaxable service. Nontaxable
service means bundled service and long
distance service.
SECTION 4. EFFECT OF ABIG,
OFFICEMAX, AMTRAK, FORTIS, AND
REESE BROS.
(a) Tax treatment of communications
service after ABIG, OfficeMax, Amtrak,
Fortis, and Reese Bros. The Service will
follow ABIG, OfficeMax, Amtrak, Fortis,
and Reese Bros. Accordingly, taxpayers
are no longer required to pay tax under
§ 4251 for nontaxable service. In addition,
collectors or taxpayers may request a refund of tax paid under § 4251 on nontaxable service that was billed to the taxpayers
during the period after February 28, 2003,
and before August 1, 2006 (the relevant period).
(b) Tax on local-only service. Collectors should continue to collect and pay
over the § 4251 tax on amounts paid for
local-only service. As noted in section
3(b) of this notice, local-only service in-

June 19, 2006

cludes amounts paid for facilities or services provided in connection with local
telephone service. Thus, for example, tax
will continue to be imposed on amounts
paid by a taxpayer for renting an amplifier phone provided in connection with local telephone service that is subject to tax.
(c) Effect on collectors. Collectors are
directed to cease collecting and paying
over tax under § 4251 on nontaxable service that is billed after July 31, 2006, and
are not required to report to the IRS any
refusal by their customers to pay any tax
on nontaxable service that is billed after
May 25, 2006. Collectors should not pay
over to the IRS any tax on nontaxable
service that is billed after July 31, 2006.
The form will require collectors to certify that for the third quarter of 2006 the
§ 4251 tax reported on the Form 720 does
not include any tax on nontaxable service
that was billed after July 31, 2006. Consequently, the IRS will deny all taxpayer
requests for refund of tax on nontaxable
service that was billed after July 31, 2006.
All such requests should be directed to
the collector. In addition, collectors may
repay to taxpayers the tax on nontaxable
service that was billed before August 1,
2006, but are not required to repay such
tax. Collectors may also request a refund
or make an adjustment to their separate
accounts, as appropriate, subject to the
provisions of § 6415 and section 5(d)(4)
of this notice. Collectors must continue to
collect and pay over tax under § 4251 on
amounts paid for local only service.
SECTION 5. REQUESTS FOR CREDIT
OR REFUND
(a) In general—(1) Request must follow
this notice. The Commissioner agrees to
credit or refund the amounts paid for nontaxable service if the taxpayer requests the
credit or refund in the manner prescribed
in this notice.
(2) Form of request. Taxpayers may request a credit or refund of tax on nontaxable service that was billed after February
28, 2003, and before August 1, 2006, only
on their 2006 Federal income tax returns.
For this purpose, the 2006 income tax return is the income tax return for calendar
year 2006 or for the first taxable year including December 31, 2006. Forms 1040
(series), 1041, 1065, 1120 (series), and
990–T will include a line for requesting the

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overpayment amount. Persons that are not
otherwise required to file a federal income
tax return must nevertheless file a return
to obtain the credit or refund. Except as
provided in section 5(d)(4) of this notice,
a request for this credit or refund on any
other form (such as a Form 720, 843, or
8849) will not be processed by the Service.
Taxpayers will be permitted to request the
safe harbor amount under paragraph (c) of
this section only if they have paid all taxes
billed by their service provider after February 28, 2003, and before August 1, 2006.
(3) Guidance on the form. The instructions to the respective federal income tax
return forms will provide additional guidance. The forms and instructions will require taxpayers to certify that (1) the taxpayer has not received from the collector a
credit or refund of the tax paid on nontaxable service billed during the relevant period and (2) the taxpayer will not ask the
collector for a credit or refund of that tax
and has withdrawn any such request that
was previously submitted. The instructions will also require that taxpayers, except for those individuals using the safe
harbor amount, retain records that substantiate the request. These records should include bills from the collector that show the
amount of tax charged for nontaxable service for each month during the relevant period and receipts, canceled checks, or other
evidence that the amount requested was
actually paid.
(b) Period of request. The Commissioner will authorize the scheduling of an
overassessment under § 6407 to preserve
the period of limitations during which taxpayers may request refunds of the tax on
nontaxable service that was billed to customers after February 28, 2003, and before
August 1, 2006. Therefore, requests may
be made for credits or refunds of tax paid
for nontaxable service billed after February 28, 2003, and before August 1, 2006.
(c) Amount of the request—(1) Requests by individual taxpayers—(i) Safe
harbor amount. Individual taxpayers may
request a safe harbor amount. No documentation will be required to be submitted
or kept to support the safe harbor request.
However, taxpayers will be permitted to
request the safe harbor amount only if
they have paid all taxes billed by their
service provider after February 28, 2003,
and before August 1, 2006; have not received a credit or refund of these taxes

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from the service provider, and either have
not requested such a credit or refund from
the service provider or have withdrawn
any such request. The amount of this safe
harbor is still under consideration and will
be announced in later guidance.
(ii) Actual amount. Taxpayers that do
not request the safe harbor amount may
request a credit or refund of the actual
amount of tax they paid.
(d) How to file—(1) Requests by individual taxpayers. Individual taxpayers
may request a credit or refund of federal
excise taxes paid on nontaxable service
only on their 2006 Form 1040, 1040A,
or 1040–EZ, U.S. Individual Income Tax
Return. Individuals who are not otherwise
required to file a federal income tax return
must nevertheless file Form 1040EZ–T
to request the credit or refund. Individual
taxpayers, including Schedule C filers,
may request either the safe harbor amount
or the actual amount of tax paid for nontaxable service.
(2) Requests by taxpayers other than individual taxpayers. Taxpayers other than
individual taxpayers (entities) may request
only the actual amount of tax paid on nontaxable service billed during the relevant
period. No safe harbor amount is allowed
for entities.
(3) Requests by entities—(i) In general.
Entities may request a credit or refund of
federal excise taxes paid on nontaxable
service only on their 2006 income tax returns. Any part of the credit or refund attributable to tax payments that were deducted as an ordinary and necessary business expense (including in the determination of unrelated business taxable income)
must be included in income for the taxable year in which the refund is received
or accrued to the extent that the tax payments reduced the amount of federal income tax (or unrelated business income
tax) imposed.
(ii) Partnerships. A partnership, as defined in § 7701(a)(2), may request a credit
or refund of federal excise taxes paid on
nontaxable service only on its 2006 Form
1065, U.S. Return of Partnership Income.
Any amount of the credit or refund included in partnership income and any interest on the credit or refund must be reported on the partnership’s return for the
taxable year in which received or accrued
and must be allocated to its partners on the
Schedule K–1, Partner’s Share of Income,

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Deductions, Credits, etc., for that taxable
year.
(iii) S Corporations. An S Corporation, as defined in § 1361, may request
a credit or refund of federal excise taxes
paid on nontaxable service only on its 2006
Form 1120S, U.S. Income Tax Return for
an S Corporation. Any amount of the
credit or refund included in S Corporation income and any interest on the credit
or refund must be reported on the S Corporation’s return for the taxable year in
which received or accrued and must be allocated to its shareholders on the Schedule K–1, Shareholder’s Share of Income,
Deductions, Credits, etc., for that taxable
year.
(iv) Estates and trusts. An estate or
a trust, as defined in § 301.7701–4(a) of
the Procedure and Administration Regulations, may request a credit or refund of federal excise taxes paid on nontaxable service only on its 2006 Form 1041, U.S. Income Tax Return for Estates and Trusts.
Any amount of the credit or refund included in the estate’s or trust’s income and
any interest on the credit or refund must
be reported on the estate’s or trust’s Form
1041, U.S. Income Tax Return for Estates
and Trusts, for the taxable year in which
received or accrued. However, for a trust
that is treated as owned by the grantor or
other person under subpart E (§ 671 and
following), part I, subchapter J, chapter
1 of the Internal Revenue Code (grantor
trust), the owner of the trust may request
a credit or refund of federal excise taxes
treated as paid by the owner for nontaxable
service only on its applicable 2006 federal
tax return.
(v) Tax exempt organizations. An organization that is described in § 501(a)
may request a credit or refund of federal
excise taxes paid on nontaxable service
only on its 2006 Form 990–T, Exempt Organization Business Income Tax Return.
Tax exempt organizations that are not otherwise required to file a federal income
tax return must nevertheless file Form
990–T to request the credit or refund. Any
amount of the credit or refund included
in the organization’s unrelated business
taxable income must be reported on the
organization’s Form 990–T, Exempt Organization Business Income Tax Return,
for the taxable year in which received or
accrued. An organization that is subject to
tax on its interest income must also report

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any interest on the credit or refund on its
Form 990–T, Exempt Organization Business Income Tax Return, for the taxable
year in which received or accrued.
(vi) Corporations. A corporation, as
defined in § 7701(a)(3), that is not described in section 5(d)(3)(iii) of this notice
may request a credit or refund of federal
excise taxes paid on nontaxable service
only on its 2006 Form 1120 (series) income tax return (generally, Form 1120,
U.S. Corporation Income Tax Return).
Any amount of the credit or refund included in the corporation’s income and
any interest on the credit or refund must
be reported on the corporation’s income
tax return for the taxable year in which
received or accrued. Corporations that
are not otherwise required to file a federal
income tax return must nevertheless file
Form 1120 (series) to request the credit or
refund.
(vii) Other nonfiling entities. Entities
that are not otherwise required to file a
federal income tax return must file Form
990–T to request the credit or refund.
(4) Requests and adjustments by collectors—(i) Section 6415 conditions to allowance. The conditions to allowance described in § 6415 apply to all requests and
adjustments by collectors, as defined by
section 2(a)(3) of this notice. Thus, a request by a collector is allowed only if the
person that paid over the tax establishes
that it has repaid the amount of the tax to
the person from whom the tax was collected, or obtains the written consent of
such person to the allowance of the credit
or refund.
(ii) Requests for regular method collectors—(A) In general. A person that collected the tax imposed by § 4251 on nontaxable service and paid it over to the government based on amounts actually collected under § 40.6302(c)–1(a)(2)(i) of the
Excise Tax Procedural Regulations (regular method collectors) may request a credit
or refund.
(B) Form of the request. Regular
method collectors may use Form 720X,
Amended Quarterly Federal Excise Tax
Return, line 1, IRS No. 22, for credit or
refund of amounts collected and repaid to
taxpayers.
(iii) Account adjustments for alternative method collectors. A person that
collected the tax imposed by § 4251 on
nontaxable service and paid it over to the

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government based on amounts considered
as collected under § 40.6302(c)–1(a)(2)(ii)
(alternative method collectors) may adjust
the separate account for the amount of an
overpayment. The required adjustment
to the separate account is described in
§ 40.6302(c)–3(b)(2)(ii)(C). The adjustment is reflected on Form 720, Schedule
A, line 2, but may not reduce tax liability
on Form 720 below zero.
(e) Interest on the credit or refund included in income. If a taxpayer requests a
credit or refund of the actual amount of tax
paid, interest on the credit or refund of the
tax paid for nontaxable service must be included as income on the taxpayer’s income
tax return for the taxable year in which the
interest is received or accrued. Thus, individuals are generally required to report the
interest on their 2007 income tax returns.
(f) Estimated tax effects. Although the
credit or refund allowed to a taxpayer under this notice will be requested on the taxpayer’s income tax return, it is not a credit
against tax for purposes of §§ 6654 and
6655. Accordingly, the taxpayer may not
take the credit or refund into account in determining the amount of the required installments of estimated tax for 2006. In
determining the amount of the required installments of estimated tax for 2007, the income attributable to the credit or refund is
taken into account on the date the income
is paid or credited in the case of a cash
method taxpayer and on the date the return
making the request is filed in the case of an
accrual method taxpayer.
(g) Requests that do not follow the provisions of this notice. Requests that do
not follow the provisions of this notice
(whether filed before or after its publication)—
(1) Will not be processed to the extent
they relate to the tax paid on nontaxable
service that was billed after February 28,
2003; and
(2) Will be processed normally to the
extent they relate to the tax paid on nontaxable service that was billed before March
1, 2003.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Notice 2005–79, 2005–46 I.R.B. 952,
is revoked. Rev. Rul. 79–404, 1979–2
C.B. 382, will be revoked in a later revenue
ruling.

June 19, 2006

SECTION 7. DRAFTING
INFORMATION
The principal author of this notice is
Taylor Cortright of the Office of the Associate Chief Counsel (Passthroughs and
Special Industries). For further information regarding this notice, contact (202)
622–3130 (not a toll-free call).

Renewable Electricity
Production Credit and
Refined Coal Production
Credit, Publication of Inflation
Adjustment Factor and
Reference Prices for Calendar
Year 2006
Notice 2006–51
This notice publishes the inflation adjustment factor and reference prices for
calendar year 2006 for the renewable electricity production credit and the refined
coal production credit under § 45 of the
Internal Revenue Code. The 2006 inflation adjustment factor and reference prices
are used in determining the availability of
the credits. The 2006 inflation adjustment
factor and reference prices apply to calendar year 2006 sales of kilowatt-hours of
electricity produced in the United States or
a possession thereof from qualified energy
resources and to calendar year 2006 sales
of refined coal produced in the United
States or a possession thereof.
BACKGROUND
Section 45(a) provides that the renewable electricity production credit for any
tax year is an amount equal to the product of 1.5 cents multiplied by the kilowatt
hours of specified electricity produced by
the taxpayer and sold to an unrelated person during the tax year. This electricity
must be produced from qualified energy
resources and at a qualified facility during
the 10-year period beginning on the date
the facility was originally placed in service.
Section 45(b)(1) provides that the
amount of the credit determined under
§ 45(a) is reduced by an amount which
bears the same ratio to the amount of the
credit as (A) the amount by which the

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reference price for the calendar year in
which the sale occurs exceeds 8 cents,
bears to (B) 3 cents. Under § 45(b)(2),
the 1.5 cent amount in § 45(a), the 8 cent
amount in § 45(b)(1), the $4.375 amount in
§ 45(e)(8)(A), and in § 45(e)(8)(B)(i) the
reference price of fuel used as feedstock
(within the meaning of § 45(c)(7)(A)) in
2002 are each adjusted by multiplying the
amount by the inflation adjustment factor
for the calendar year in which the sale
occurs. If any amount as increased under
the preceding sentence is not a multiple
of 0.1 cent, the amount is rounded to the
nearest multiple of 0.1 cent.
Section 45(c)(1) defines qualified
energy resources as wind, closed-loop
biomass, open-loop biomass, geothermal energy, solar energy, small irrigation
power, municipal solid waste, and qualified hydropower production.
Section 45(d)(1) defines a qualified facility using wind to produce electricity as
any facility owned by the taxpayer that is
originally placed in service after December 31, 1993, and before January 1, 2008.
See § 45(e)(7) for rules relating to the inapplicability of the credit to electricity sold
to utilities under certain contracts.
Section 45(d)(2)(A) defines a qualified
facility using closed-loop biomass to produce electricity as any facility (i) owned
by the taxpayer that is originally placed in
service after December 31, 1992, and before January 1, 2008, or (ii) owned by the
taxpayer which before January 1, 2008, is
originally placed in service and modified
to use closed-loop biomass to co-fire with
coal, with other biomass, or with both,
but only if the modification is approved
under the Biomass Power for Rural Development Programs or is part of a pilot
project of the Commodity Credit Corporation as described in 65 Fed. Reg. 63052.
Section 45(d)(2)(B) provides that in the
case of a qualified facility described in
§ 45(d)(2)(A)(ii), (i) the 10-year period referred to in § 45(a) is treated as beginning no earlier than the date of enactment
of § 45(d)(2)(B)(i); (ii) the amount of the
credit determined under § 45(a) with respect to the facility is an amount equal
to the amount determined without regard
to § 45(d)(2)(B)(ii) multiplied by the ratio
of the thermal content of the closed-loop
biomass used in the facility to the thermal
content of all fuels used in the facility; and
(iii) if the owner of the facility is not the

2006–25 I.R.B.