Union Telecom, LLC v. United States

UNION TELECOM, LLC, Plaintiff, v. THE UNITED STATES, Defendant.

No. 16-1409T

United States Court of Federal Claims

August 16, 2019

26 U.S.C. § 4521; Federal Excise Tax; Tax Refund; Prepaid Telephone Cards; Telecommunications Carrier; Transferee; Telecommunications Carrier Affiliate; Alter Ego.

Andrew P. Kawel, with whom was Edward A. Maldonado, Law Offices of Edward A. Maldonado PA, Coral Gables, Florida, for Plaintiff.

Benjamin C. King, with whom was Richard Zuckerman, Principal Deputy Assistant Attorney General, David I. Pincus, Chief, Court of Federal Claims Section, and G. Robson Stewart, Assistant Chief, Tax Division, Court of Federal Claims Section, U.S. Department of Justice, Washington, D.C., for Defendant.

OPINION AND ORDER

WHEELER, Judge.¹

This case arises from a complex corporate structure designed to avoid the payment of Federal Excise Taxes ("FET") to the United States Government. Plaintiff Union Telecom, LLC ("Union Telecom") is seeking a refund of taxes allegedly paid on its purchase of prepaid long-distance telephone cards. A subsidiary of IDT Corporation ("IDT"), IDT Puerto Rico & Company ("IDT PR"), sold cards to Union Telecard Alliance, LLC ("UTA"), a separate, IDT majority-owned entity. UTA then resold these cards to its majority-owned subsidiary, Union Telecom. Union Telecom asserts that the price it paidfor these cards included a three-percent FET on toll (long distance) telecommunications services pursuant to 26 U.S.C. § 4251 of the Internal Revenue Code ("FET" or "the tax").² In 2006, the IRS entitled taxpayers to a refund for FET paid between approximately 2003 and 2006. Plaintiff avers that it paid $17,051,190 in FET during that period and claims that amount in tax refunds, plus $2,714,380 in interest.

Union Telecom is entitled to a refund if (1) it paid the FET; and (2) it was the first non-telecommunications carrier to purchase prepaid phone cards from a telecommunications carrier in the chain of these cards' distribution. The evidence presented at trial shows that Union Telecom did not pay any FET during the relevant period and that it was not the first non-telecommunications carrier to buy IDT's cards. The Court, therefore, DENIES Plaintiff's petition for a refund.

Background³

A. Prepaid Telephone Cards

Prepaid telephone cards allow purchasers to access a fixed amount of calling time on a telecommunications carrier's ("carrier") network by using a unique personal identification number ("PIN"). See Section 4251(d)(3); Treas. Reg. § 49.4251-4(b). After making a call, the number of minutes of remaining calling time on the card is reduced by each call's duration.

B. The Federal Excise Tax on Prepaid Phone Cards

1. Table Services

Section 4251 imposes a three-percent tax on "amounts paid for communications services . . . ." § 4251(a)(1); see also § 4251(b)(2). Taxable "communications services" include local telephone service, toll telephone service, and teletypewriter exchange service. See §§ 4251(b)(1), 4252. The taxpayer is "the person paying for such [communications] services." § 4251(a)(2).

2. FET Collection

Section 4251(d) explains the FET's collection process for telecommunications services acquired by prepaid phone card. The card's face value (the amount the consumeris charged for the card) is the taxable amount. § 4251(d)(1)(A). That sum is considered paid, and subject to the tax, "when the card is transferred by a telecommunications carrier to any person who is not a carrier." § 4251(d)(1)(B). The taxpayer—the first non-carrier to purchase cards from a carrier—is called the "transferee." See Treas. Reg. § 49.4251-4(b) (defining the FET taxpayer as the first non-telephone carrier that purchases prepaid phone cards from a telephone carrier). Sales between carriers, or between non-carriers are, therefore, not FET-taxable events. Lastly, the transferee taxpayer pays the FET indirectly. The carrier selling the cards collects the tax from the transferee and then remits that sum to the Government. § 4291; Treas. Reg. § 49.4251-4(d)(1).

The distinction between carriers and non-carriers is, therefore, essential to determining who pays this tax. "Carrier", under this taxation scheme, "means a telecommunications carrier as defined in 47 U.S.C. § 153." Treas. Reg. § 49.4251-4(b). That section defines a "telecommunications carrier" as "any provider of telecommunications services" but not aggregators of such services. § 153(51).⁴ Whether an entity offers telecommunications services drives the carrier-transferee distinction. Those that offer telecommunications services are carriers; those that do not are transferees for purposes of the FET.

3. The IRS Reinterprets "Toll Telephone Service"

Historically, the IRS maintained that prepaid phone cards offered toll telephone services. "Toll telephone service" is 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." § 4252(b)(1). The IRS interpreted the "distance" and "time" variables in the disjunctive. It therefore collected FET when a call's cost varied by either duration or distance. The IRS subjected prepaid phone cards to FET as offering toll services because they billed customers by a call's elapsed time.

In 2006, the IRS departed from that interpretation.⁵ It recognized that to be subject to this tax, section 4252(b)(1) requires that providers vary charges by both call length and distance. Accordingly, a call that is billed by only elapsed time but not distance fell outside of the definition of a toll taxable service. See IRS Notice 2006-50, 2006-1 C.B. 1141 at 1, 6-7, https://www.irs.gov/pub/irs-drop/n-06-50.pdf (hereinafter Notice 2006-50). Since prepaid phone cards charged customers for a call's time but not its distance, this notice put the cards outside the definition of an FET-taxable service. The IRS also entitled the transferee to a credit or refund of FET paid on toll services "after February 28, 2003, and before August 1, 2006 (the relevant period)." Id. at 6.

C. IDT's Corporate Structure

1. IDT

Bringing a prepaid phone card to market typically involves a chain of different entities, each performing a distinct role. Carriers own the infrastructure—the network phonelines themselves—used to make a call. Service suppliers buy minutes of calling time on a carrier's network from the carrier which the supplier makes accessible through a PIN. Suppliers also typically assign a "face value" to the card which represents the price that the customer will ultimately pay for the card. Distributors purchase these PINs (at a discount from face value), print physical cards bearing the PIN and an access number, then market and resell these cards to retailers (at a lesser discount). Retailers sell the cards to the public for face value.

IDT is a Federal Communications Commission ("FCC") licensed interstate and international telecommunications carrier that offered prepaid phone cards. PX 1. IDT created a similar series of subsidiaries and affiliates as outlined above to distribute and sell its cards.

2. UTA

Carlos Gomez formed UTA to distribute prepaid phone cards from various suppliers to retailers in New York. In 1998, IDT entered into a joint venture with UTA to gain access to its valuable distribution network. PX 73; JX 7. The joint venture (which continued to operate under the UTA brand) marketed and sold IDT's cards (in addition to other carriers' cards) to UTA's network of retailers. PX 73; Farber, Tr. 487-89; Shah, Tr. 79. IDT owned 51% of the joint venture and held the right to appoint its President, Chief Financial Officer,and Chief Operating Officer. PX 73 at 1, 8-9, 19. Gomez held the remaining 49% and could appoint the Chief Executive Officer.⁶ Id. However, Gomez came to direct UTA's policies and day-to-day operations, wielding considerably more power over the joint venture than the partnership agreement allocated to him. See Peterson, Tr. 212-13; Katz, Tr. 536-37. Lastly, UTA was not independently licensed as a carrier by the FCC and was not included under IDT's license.

3. Union Telecom

Prakash "Peter" Shah owned and operated a chain of convenience stores in New York. Shah, Tr. 76. In the 1990s, Shah began selling prepaid phone cards in his stores, some of which he purchased from Gomez. Katz, Tr. 533. Accordingly, Shah and Gomez had a longstanding business relationship when Gomez entered into the joint venture with IDT. Shortly after the UTA joint venture's formation, UTA and Shah created Union Telecom to distribute IDT's cards to Shah's network of stores. JX 8.⁷ UTA owned 51% of Union Telecom, Shah owned 49%, and the two shared profits equally. Id.

4. IDT PR

In or around 2001 (when the IRS still interpreted prepaid phone cards as FET-taxable toll services), IDT created IDT PR during a reorganization aimed to avoid paying FET. A taxpayer is liable for FET on toll communications services when the service is paid for "within the United States." § 4252(b)(1); JX 5 at 6. IDT restructured its prepaid phone card business to put the taxable transaction outside of the United States and, therefore, outside of the definition of an FET-taxable service. JX 5; JX 7; Peterson, Tr. 269. IDT's wholly owned Dutch holding company, Strategic Dutch Holdings BV, established two wholly owned subsidiaries, IDT Netherlands BV and New Phone Dutch Holdings BV. JX 7; JX 6. These two new Dutch companies then formed a partnership, IDT PR.⁸ JX 7; JX 6; Peterson, Tr. 267-69. IDT PR held itself out as a carrier. DX 4. IDT (a carrier) sold minutes of calling time to IDT PR (also a carrier). Peterson, Tr. 228, 291. IDT PR then separated the minutes into blocks accessible by PINs, JX 7; Peterson, Tr. 228, and sold these PINs to UTA (a non-carrier). JX 7. UTA would then depositpayment in IDT PR's Irish bank account. DX 4; JX 6. Under this scheme, the taxable event—the transfer of cards from IDT PR,...