Fortis, Inc. v. U.S.

420 F.Supp.2d 166

FORTIS, INC., Plaintiff, v. UNITED STATES of America, Defendant.

No. 03 Civ. 5137(JGK).

United States District Court, S.D. New York.

September 16, 2004.

Bradley S. Waterman, Washington, DC, Henry D. Levine, Levine, Blaszak, Block and Boothby, L.L.P., Washington, DC, Richard C. Yeskoo, Yeskoo, Hogan & Tamlyn, L.L.P., New York, NY, Stephen J. Rosen, Levine, Blaszak, Block and Boothby, L.L.P., Washington, DC, for Fortis, Inc.

Benjamin H. Torrance, U.S. Attorney's Office, SDNY, New York, NY, for U.S.

OPINION and ORDER

KOELTL, District Judge.

The plaintiff, Fortis, Inc. ("Fortis"), brought this action to obtain a refund from the Internal Revenue Service ("IRS") on excise taxes that Fortis had remitted for certain long-distance telephone service. The primary issue is whether the definition of taxable "toll telephone service" in 26 U.S.C. § 4252(b)(1) includes long-distance service where charges are based on the elapsed transmission time of a call but not the distance the call travels. Fortis has filed a motion for summary judgment seeking judgment in its favor on the liability of the Government on Fortis's claim to the refund. The Government opposes the motion and has filed a cross-motion for summary judgment dismissing the complaint on the grounds that the telephone service at issue falls within the definition in 26 U.S.C. § 4252(b)(1), or, in the alternative, falls within the other definitions of taxable telephone services in § 4252.

I.

The standard for granting summary judgment is well established. Summary judgment may not be granted unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Gallo v. Prudential Residential Servs. Ltd. P'ship, 22 F.3d 1219, 1223 (2d Cir.1994). "The trial court's task at the summary judgment motion stage of the litigation is carefully limited to discerning whether there are genuine issues of material fact to be tried, not to deciding them. Its duty, in short, is confined at this point to issue-finding; it does not extend to issue-resolution." Gallo, 22 F.3d at 1224. The moving party bears the initial burden of "informing the district court of the basis for its motion" and identifying the matter that "it believes demonstrate[s] the absence of a genuine issue of material fact." Celotex, 477 U.S. at 323, 106 S.Ct. 2548. The substantive law governing the case will identify those facts which are material and "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

In determining whether summary judgment is appropriate, a court must resolve all ambiguities and draw all reasonable inferences against the moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962)); see also Gallo, 22 F.3d at 1223. Summary judgment is improper if there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the nonmoving party. See Chambers v. TRM Copy Ctrs. Corp., 43 F.3d 29, 37 (2d Cir.1994). If the moving party meets its burden, the burden shifts to the nonmoving party to come forward with "specific facts showing that there is a genuine issue for trial." Fed. R.Civ.P. 56(e). The nonmoving party must produce evidence in the record and "may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible." Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir.1993); see also Scotto v. Almenas, 143 F.3d 105, 114-15 (2d Cir. 1998).

II.

The undisputed facts with respect to the plaintiff's refund claim are as follows.¹ From October 1, 1998 through March 31, 2002, Fortis purchased from AT & T inbound and outbound international and domestic interstate long distance service and intrastate long distance service in the states of Georgia, Minnesota, Missouri, New York, and Wisconsin. (Pl.'s Rule 56.1 Statement of Undisputed Facts ("Pl.'s Rule 56.1 Stmt.") ¶ 2.) The terms of Fortis's inbound and outbound international and domestic long distance service were governed by various "contract tariffs" and AT & T's interstate tariffs. (See id. ¶¶ 3-7 & Exs. 1a, 2-5.) Fortis's intrastate service was purchased pursuant to AT & T's Custom Network Services Tariffs filed with the applicable state regulatory authorities. (Id. ¶8.)

Under the rate schedules applicable to Fortis's long distance service under the tariffs, with the exception of calls made to and from Mexico, the charge for each call was based on the call's duration, or elapsed time. (See id. ¶ 9; see, e.g., Contract Tariff No. 13497, § 7.A, attached at id. Ex. 4.) The rate schedules specified that the rates applied for all "Mileages & Bands," thus making the cost of a call independent of the distance the call travels. (Id.)

AT & T collected from Fortis federal excise taxes on the services provided to Fortis and was legally obligated to remit those taxes to the IRS and report the taxes paid each quarter on Form 720. (Id. ¶ 13-14.) On February 22, 2002, Fortis timely filed claims for a refund of $392,813.82 representing the aggregate amount of federal excise taxes Fortis paid on the services from October 1, 1998 through September 30, 2001. On October 25, 2002, Fortis timely filed claims for a refund of $46,571.02 representing the aggregate amount of federal excise taxes Fortis paid on the services from October 1, 2001 through March 31, 2002. (Id. ¶¶ 15, 17.) The IRS has received these claims and has not acted on them. (Id. ¶¶ 16, 18.)

The plaintiff has now filed a motion for partial summary judgment on the Government's liability to refund the plaintiff's taxes, although if the motion is granted, the amount of the refund would still need to be resolved. The Government has filed a cross-motion for summary judgment arguing that the judgment should be granted dismissing the complaint because the Government properly imposed and collected the telephone excise taxes at issue.

III.

The parties generally agree that there are no disputed issues of fact and that the motions primarily involve the same legal question of whether Fortis's service can be taxed under 26 U.S.C. §§ 4251 and 4252. Section 4251 of the Internal Revenue Code imposes a three-percent excise tax on amounts paid for "communications services," which includes (A) local telephone service, (B) toll telephone service, and (C) teletypewriter exchange service. 26 U.S.C. § 4251(a), (b)(1). Section 4252(b) defines "toll telephone service" as

(1) a telephonic quality communication for which (A) there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication and (B) the charge is paid within the United States, and

(2) 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 system area in which the station provided with this service is located.

26 U.S.C. § 4252(b).

With predecessors dating to the nineteenth century, a federal excise tax on various telecommunications services has been in effect continuously from 1932 to the present.² Sections 4251 and 4252 were initially enacted in 1954 and amended in 1958, and Congress adopted the current definitions found in § 4252 in the Excise Tax Reduction Act of 1965, Pub.L. No. 89-44, § 302, 79 Stat. 136, 145-46 (the "1965 Act" or the "1965 amendments").³ At that time, AT & T was the dominant long-distance carrier in the United States, and the definition of "toll telephone service" covered AT & T's two types of long-distance service: (1) "Message Telephone Service" ("MTS") charged callers for each call based on the time of day, duration of the call, and the distance traveled; and (2) "Wide Area Telephone Service" ("WATS") generally allowed subscribers, for a flat charge, to make unlimited calls within a defined area, sometimes limited as to the total elapsed time. (See Def.'s Rule 56.1 Stmt. ¶¶ 1-2 & Ex. A (Decl. of Alan Pearce ("Pearce Deer), dated Nov. 17, 2003, at 3-5).) MTS rates were based on a system of "mileage bands," where, for example, a different rate would be charged for calls traveling 1-10 miles, 11-22 miles, 23-55 miles, 56-124 miles, and so forth. (See Def.'s Rule 56.1 Stmt. ¶ 3; Pearce Decl. at 4.) In 1965 and the decades to follow, "MTS, plain old long distance service, was the largest, in terms of traffic volume and revenue levels, and the most publicly visible of the traditional telephone industry service offerings." (See Pearce Decl. at 5.)

Between 1997 and 2000, however, AT & T and other long-distance carriers began to abandon the mileage-band system, due in part to competition with wireless carriers. (See Pearce Decl. at 10.) Now the dominant form of long-distance service involves a single interstate long-distance rate for the continental United States, although mileage bands remain in use in some states for intrastate long-distance service. (See id.; Def.'s Rule 56.1 Stmt. ¶¶ 4-5.) This shift in service has raised the current issue: Do services that are not distance-sensitive fall within 26 U.S.C. § 4252(b)(1), which defines "toll telephone service" as involving "a toll charge which varies...