n-07-11.pdf

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Part III – Administrative, Procedural, and Miscellaneous

Communications Excise Tax; Toll Telephone Service

Notice 2007-11

SECTION 1. PURPOSE

This notice amplifies, clarifies, and modifies Notice 2006-50, 2006-25 I.R.B.
1141. That notice provides that the tax imposed by § 4251 of the Internal Revenue
Code (relating to communications excise tax) does not apply to amounts paid for long
distance service and bundled service (collectively, nontaxable service) and also
provides that taxpayers may request a credit or refund of tax on nontaxable service that
was billed to the taxpayer after February 28, 2003, and before August 1, 2006, only on
their 2006 federal income tax returns. This notice--
(a) Provides the conditions under which individual taxpayers may use the
standard amounts announced in IR-2006-137 (August 31, 2006) on their 2006 federal
income tax returns to request a credit or refund of the excise tax paid on nontaxable
service;
(b) Provides guidance regarding the Business and Nonprofit Estimation Method,
announced in IR-2006-179 (November 16, 2006);
(c) Answers questions that have been raised since the issuance of Notice 2006-
50; and

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(d) Modifies the requirement for claims filed on or before May 25, 2006.
SECTION 2. BACKGROUND
For the statutory background of the tax imposed by § 4251, see section 2 of
Notice 2006-50. When used in this notice, local-only service, long distance service, and
nontaxable service have the meaning given to the terms in section 3 of Notice 2006-50.
Bundled service has the meaning given to the term by section 5 of this notice.
SECTION 3. STANDARD AMOUNT
(a) Conditions to allowance of standard amount
. A request for credit or refund of
the standard amount, instead of the actual amount of federal communications excise tax
paid for nontaxable service, may be made on a 2006 Form 1040 Series, U.S. Individual
Income Tax Return, if any person filing the return, or any dependent listed on the
return--
(1) Paid for any nontaxable service (other than for a prepaid telephone card or
prepaid cellular telephone) that was billed to the taxpayer after February 28, 2003, and
before August 1, 2006;
(2) Paid all federal communications excise taxes billed by their
telecommunications provider after February 28, 2003, and before August 1, 2006;
(3) Has not received a credit or refund of these taxes from the
telecommunications provider;
(4) Has not requested a credit or refund from the telecommunications provider or,
if so requested, has withdrawn any such request; and
(5) Did not file any other claim or request for credit or refund with the IRS for the
federal communications excise tax for a period after February 28, 2003.

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(b) Calculating standard amounts
--(1) In general--(i) 2006 Form 1040 Series
(other than EZ). To determine the standard amount, taxpayers must first determine the
number of exemptions for which they are entitled on their 2006 Form 1040 Series
federal income tax return (other than the 2006 Form 1040 EZ). The Instructions to the
2006 Form 1040 Series federal income tax return and Publication 501, Exemptions,
Standard Deduction, and Filing Information, provide guidance on determining the
correct number of exemptions. Once the individual determines the number of
exemptions, the individual can select the appropriate standard amount based upon the
number of those exemptions. Individuals should refer to the 2006 federal income tax
return instructions to ensure that the standard amount is entered on the appropriate part
of the return.
(ii) 2006 Form 1040 EZ
. On line 5, a taxpayer that checks the box for “you” is
treated as having one exemption. A taxpayer that checks the boxes for “you” and
“spouse” is treated as having two exemptions.
(2) Amounts
--(i) For each 2006 Form 1040 Series federal income tax return filed
showing one exemption for purposes of determining the standard amount, the standard
amount allowed on that return is $30.
(ii) For each 2006 Form 1040 Series federal income tax return filed showing two
exemptions for purposes of determining the standard amount, the standard amount
allowed on that return is $40.
(iii) For each 2006 Form 1040 Series federal income tax return filed showing
three exemptions for purposes of determining the standard amount, the standard
amount allowed on that return is $50.

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(iv) For each 2006 Form 1040 Series federal income tax return filed showing four
or more exemptions for purposes of determining the standard amount, the standard
amount allowed on that return is $60.
(c) Interest. The standard amount represents both the overpayment of the
federal communications excise tax paid on nontaxable service and the interest on that
overpayment.
(d) Actual Amounts. To request a credit or refund for the actual amount of
federal communications excise tax paid, taxpayers must complete Form 8913, Credit for
Federal Telephone Excise Tax Paid, and attach that form to their 2006 Form 1040
Series federal income tax return.
(e) Examples
. The following examples illustrate the application of this section.
Example 1
. A, an individual, files a joint return with Z, A’s spouse. A meets the
conditions to allowance described in paragraph (a) of this section. A used the 2006
federal income tax return instructions to determine that their correct number of
exemptions is two. A may request the credit or refund of the federal communications
excise tax under § 4251 for $40.
Example 2
. B, an individual, used the 2006 federal income tax return instructions
to determine that she had one exemption. B further used her telephone bills for the
period March 1, 2003, through July 31, 2006, to determine that the total amount paid for
federal communications excise tax under § 4251 for nontaxable service to all
telecommunications providers was $45. Completing Form 8913 and attaching it to her
2006 Form 1040 Series federal income tax return, B may request a credit or refund of
$45, the actual amount she paid in federal communications excise tax on nontaxable

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service under § 4251. As an alternative, B may request a credit or refund of the
standard amount of $30 without having to complete Form 8913.
SECTION 4. DISTINCTION BETWEEN LOCAL-ONLY SERVICE AND BUNDLED
SERVICE
(a) Technology for transmitting telephone call. The method for sending or
receiving a call, such as on a landline telephone, wireless (cellular) telephone or some
other method, does not affect whether a service is local-only or bundled.
(b) Combined local exchanges
. If two or more telecommunications providers
combine their resources to expand the geographic area that each treats as “local”
service and each bills its customers for that service as local-only service, then that
service is local-only service.
(c) Billing method
. Section 3(a) of Notice 2006-50 and section 5 of this notice
provide that bundled service is local and long distance service provided under a plan
that does not separately state the charge for the local telephone service. Thus, if local
and long distance service is billed to a customer on a single bill but the
telecommunications company separately states the amount paid for local-only service
and the amount paid for long distance service, the amount paid for local-only service is
subject to federal communications excise tax.
(d) Examples
. The following examples illustrate the application of this section.
Example 1. Customer A purchases telecommunications service from B, a
telecommunications provider. Such service includes both local-only service and long
distance service. B’s bill to A states $X for telecommunications service. The bill does
not separately state a charge for either local-only service or long distance service.

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Since the bill does not separately state the charge for local-only service, the service is a
bundled service. Thus, the entire amount of A’s telecommunications service is bundled
service and thus nontaxable service.
Example 2. Customer C purchases telecommunications service from D, a
telecommunications provider. Such service includes both local-only service and long
distance service. D’s bill to C states $X amount for telecommunications service. The
bill further states $Y amount for local-only service and $Z amount for long distance
service. Since the charges for local-only service and long distance service are
separately stated, the service is not bundled service. Accordingly, only the amounts
charged for long distance service are for nontaxable service; tax is imposed on the
amounts paid for the local-only service.
SECTION 5. CLARIFICATION OF DEFINITION OF BUNDLED SERVICE
(a) Present definition
. Section 3(a) of Notice 2006-50 defines bundled service as
local and long distance service provided under a plan that does not separately
state the charge for the local telephone 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) Reason for clarification
. The example in the second sentence of the definition
of bundled service incorrectly assumes that all Voice over Internet Protocol (VoIP)
service would provide both local and long distance service and that the charges for the
two services would not be separately stated. As noted in section 4(a) of this notice, the
method of transmitting a call is not a factor in determining whether a service is local-only

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or bundled. Accordingly, a VoIP service that provides local-only service is treated as
local-only service.
(c) Revised definition
. Accordingly, the definition of bundled service is clarified to
read as follows:
Bundled service is local and long distance service provided under a plan that
does not separately state the charge for the local telephone service. Bundled
service includes 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. If Voice over Internet
Protocol service provides both local and long distance service and the charges
are not separately stated, such service is bundled service.

SECTION 6. PREPAID TELEPHONE CARDS (PTC)
(a) In general
--(1) Prepaid telephone cards. Section 4251(d) and § 49.4251-4 of
the Facilities and Services Excise Taxes Regulations provide rules for prepaid
telephone cards (PTC). Section 49.4251-4(b) defines PTC as a card or similar
arrangement that permits its holder to obtain a fixed amount of communications
services by means of a code (such as a personal identification number (PIN)) or other
access device provided by the carrier and to pay for those services in advance. The
amount paid for PTCs is determined under the rules of §§ 4251(d)(1) and (2) and
§ 49.4251-4(c). Under this notice, the PTC will be treated as nontaxable service unless
a PTC expressly states it is for local-only service.
(2) Other cards
. This section does not address cards that permit the holder to
purchase various services in addition to telecommunications services. Such services
include, but are not limited to, ring tone downloads, music downloads, text messaging,
picture messaging, web browsing, game downloads, or screen saver downloads.
(b) Application of the tax
--(1) Definitions. Section 49.4251-4(b) provides that--

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(i) Carrier
means a telecommunications carrier as defined in 47 U.S.C. 153.
(ii) Holder means a person that purchases other than for resale.
(iii) Transferee
means the first person that is not a carrier to whom a PTC is
transferred by a carrier.
(2) Imposition, liability, and collection
. Section 4251(d) provides that the § 4251
tax is imposed on the transfer of a PTC to a transferee; § 49.4251-4(d)(1) provides that
the person liable for the tax is the transferee and that the person responsible for
collecting the tax generally is the carrier transferring the PTC to the transferee. Section
49.4251-4(d)(1) further provides that if a holder purchases a PTC from a transferee
reseller, the amount the holder pays for the PTC is not treated as an amount paid for
communications services and thus tax is not imposed on that payment.
(c) Person eligible to request credit or refund
. The transferee is the person liable
for the tax paid on a PTC and thus generally is the person eligible to request a credit or
refund of the tax it paid. The carrier is eligible to request a credit or refund only if it
meets the conditions of section 5(d)(4) of Notice 2006-50. The holder is not liable for
the tax and thus cannot request a credit or refund.
SECTION 7. PREPAID CELLULAR TELEPHONES
(a) In general
--(1) Prepaid cellular telephones. Certain telecommunications
providers offer wireless (cellular) telecommunications service on a prepaid service basis
(prepaid telephones) whereby a customer purchases the cellular telephone with a set
number of minutes available for telecommunications. When the customer exhausts the
number of minutes on the prepaid telephone, the customer may purchase additional
minutes. The customer does not enter into a contract with the telecommunications

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provider; there are no service charges after the additional purchase and no monthly
bills. Under this notice, the prepaid telephone will be treated as nontaxable service
unless the terms of the prepaid telephone service expressly state it is for local-only
service.
(2) Other prepaid cellular telephones. This section does not address
arrangements that permit the holder to purchase various services in addition to
telecommunications services. Such services include, but are not limited to, ring tone
downloads, music downloads, text messaging, picture messaging, web browsing, game
downloads, or screen saver downloads.
(b) Application of the tax
. Rules similar to the rules for PTCs, as described in
section 6 of this notice, apply to prepaid telephones. Thus, the person liable for tax is
the person (transferee) that buys the prepaid telephone from the telecommunications
provider (carrier) and the carrier is responsible for collecting the tax. Any holder of a
prepaid telephone (that is, a person that buys the prepaid telephone other than for
resale) is not liable for tax.
(c) Person eligible to request credit or refund
. The transferee is the person liable
for the tax paid on a prepaid telephone and thus generally is the person eligible to
request a credit or refund of the tax it paid. The carrier is eligible to request a credit or
refund only if it meets the conditions of section 5(d)(4) of Notice 2006-50. The holder is
not liable for the tax and thus cannot request a credit or refund.
SECTION 8. CHARGES IN CONNECTION WITH LOCAL-ONLY SERVICE
(a) Background
. Section 3(b) of Notice 2006-50 defines local-only service as
including certain services and facilities provided in connection with local telephone

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service, even though these services may also be used in connection with long distance
service. As examples, the notice cites to 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).
(b) Subscriber line charges. In addition to the examples in paragraph (a) of this
section, amounts paid for subscriber line charges, which are described in Rev. Rul. 87-
108, 1987-2 C.B. 260, are also amounts paid for local telephone service. This charge
may appear on a bill as “Federal Access Charge,” “Customer or Subscriber Line
Charge,” or “Interstate Access Charge.”
(c) Universal service fees
--(1) Background. All telecommunications companies
that provide interstate and international telecommunications service contribute to the
federal Universal Service Fund (USF). Their contributions support four Universal
Service programs established and overseen by the Federal Communications
Commission (FCC). Some telecommunications companies recover their contribution to
the USF directly from their customers by billing them for this charge. The FCC does not
require companies to pass on these costs to their customers. Each company makes a
business decision about whether and how to recover USF costs. A company that
separately states this charge on a bill may call it a “Federal Universal Service Fee” or
“Universal Connectivity Fee.”
(2) Application
. Because telecommunications providers charge the USF to their
customers in connection with their customers’ long distance service, amounts paid for
separately stated USF amounts are not amounts paid for local-only service.

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SECTION 9. PERSON TO MAKE REQUEST IF TAXPAYER IS NO LONGER IN
BUSINESS OR DECEASED
Neither Notice 2006-50 nor this notice create any special rules regarding the
person to request a credit or refund of tax for a taxpayer that no longer exists or is
deceased. The same rules that apply to requests for credits or refunds of other federal
taxes also apply to similar requests of the tax imposed under § 4251. These rules
depend upon the facts and circumstances relating to the reasons that the taxpayer no
longer exists. The Form 8913 Instructions and Publication 559, Survivors, Executors,
and Administrators, provide general guidance for taxpayers regarding deceased
taxpayers.
SECTION 10. EFFECT OF NOTICE 2006-50 ON STATE AND LOCAL
TELECOMMUNICATIONS TAXES
Neither Notice 2006-50 nor this notice affect the ability of state or local
governments to impose or collect telecommunication taxes under the respective
statutes of those governments.
SECTION 11. NO OBLIGATION OF TELECOMMUNICATIONS PROVIDERS TO
SUPPLY RECORDS TO CUSTOMERS
The IRS has been asked to require telecommunications providers to supply their
customers with those customers’ telecommunications bills for periods after February 28,
2003, and before August 1, 2006. Neither Notice 2006-50 nor this notice requires
telecommunications providers to supply billing records to their customers.

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SECTION 12. BUSINESS AND NONPROFIT ESTIMATION METHOD
(a) In general
. This section provides rules for the Business and Nonprofit
Estimation Method (EM) that eligible entities may use to determine the amount of their
credit or refund for nontaxable service. Eligible entities may, but are not required to,
use the EM instead of the actual amount of federal communications excise tax they paid
on nontaxable service to calculate the amount of their credit or refund.
(b) Definitions
. The following definitions apply to this section.
(1) Eligible entity
means--
(i) Any--
(A) Business entity (including a corporation or partnership);
(B) Trust or estate;
(C) Tax-exempt organization; and
(D) Individual owner of rental property and any self-employed individual
(including an independent contractor, sole proprietor, or farmer) but only if the individual
(including a married couple filing a joint return) reports gross rental and business
income totaling more than $25,000 on his or her 2006 federal income tax return;
(ii) That was in operation during any time from March 1, 2003 through July 31,
2006; and
(iii) That received and paid for telecommunications service that was reflected on
bills dated in April 2006 and September 2006.
(2) Total telephone expenses
means all amounts paid to every
telecommunications provider used by the eligible entity for telephone service that were
billed after February 28, 2003, and before August 1, 2006. These amounts include, but

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are not limited to, amounts paid for long distance service, local-only service, bundled
service, 900 number service, universal service fees, federal, state, and local taxes. If
an eligible entity is billed for telephone and non-telephone services on one bill each
month and does not separately track non-telephone services in its books and records,
the entire amount of that bill is included in total telephone expenses. An eligible entity
may determine the amount of its total telephone expenses by examining its books and
records, including, for example, its general ledger, check register, and canceled checks.
(3) Employee
means any person working for the taxpayer full or part time as
reported on the eligible entity’s Form 941, Employer’s Quarterly Federal Tax Return, for
the 2
nd
quarter of 2006, other than any person employed as a household employee, in a
non-pay status, on a pension, or an active member of the Armed Forces.
(c) Using the EM to determine the amount of the credit or refund
--(1) Determining
the federal excise tax as a percentage of the telephone bill--(i) First, determine the
amount of federal communications excise tax on all telephone bills dated in April 2006
and all telephone bills dated in September 2006. The amount is generally separately
stated on the bill as “FET” or “federal tax”.
(ii) Next, for all the April telephone bills and all the September telephone bills,
divide the amount of federal communications excise tax included on the bills by the total
telephone expenses on the bills. The resulting amounts are the April and September
percentages, respectively.
(iii) Next, subtract the September percentage from the April percentage. For
purposes of this notice, this amount is the federal excise tax percentage (FETP).
(2) Capping the FETP
--(i) Determine the number of employees.

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(ii) For taxpayers with 250 or fewer employees, the FETP is capped at 2 percent.
(iii) For taxpayers with more than 250 employees, the FETP is capped at 1
percent.
(d) Calculating the amount of the credit or refund--(1) Records kept on a monthly
basis. If the entity has maintained its telephone expense records on a monthly basis,
multiply the FETP amount by the taxpayer’s monthly total telephone expenses for each
month of the 41 month period from March 2003 through July 2006. The product of this
calculation is the taxpayer’s credit or refund amount.
(2) Records kept on an annual basis
. If the entity has maintained its telephone
expense records on an annual basis rather than a monthly basis, prorate its annual
amount equally to each month of that year. Thus, for example, a taxpayer maintaining
annual telephone expense records for 2003 would divide its total telephone expenses
by 12. Next, the taxpayer would use that monthly amount to complete the calculations
for the credit or refund amount for 2003.
(e) Actual Amounts
. Use of the EM is optional. Taxpayers may use the actual
amounts paid for federal communications excise tax for nontaxable service to determine
the amount of their credit or refund.
(f) Examples
. The following examples illustrate the application of this section.
Example 1
--(i) Facts. Business A has 250 employees. A’s April 2006 telephone
bill is $1,700, including federal communications excise tax of $47.60. A’s September
2006 telephone bill is $1,600, including federal communications excise tax of $24.00.
A’s total telephone expenses, for which it does not have monthly records, are as
follows:

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2003 - $10,800.00
2004 - $16,000.00
2005 - $20,000.00
2006 - $20,571.37.
(ii) Determining the April and September percentages. A’s April percentage is
2.8 percent (47.60 ÷ 1,700). A’s September percentage is 1.5 percent (24 ÷ 1,600).
(iii) Determining the FETP. The difference between A’s April percentage and
September percentage is 1.3 percent (2.8 - 1.5). Thus, the FETP is 1.3 percent.
(iv) Capping the FETP
. Because A’s number of employees does not exceed
250, A’s FETP is not capped at 1 percent.
(v) Prorating. Because A did not maintain its total telephone expense records by
month, it prorates those amounts equally to each month within the March 2003 – July
2006 period for each particular year. For 2003, A divides its total telephone expense of
$10,800 by 12 and multiplies that result by 10 (the number of months between March
and December). ([10,800 ÷ 12] x 10 = 9,000.) For 2006, A divides its total telephone
expense of $20,571.37 by 12 and multiplies that result by 7 (the number of months
between January and July). ([20,571.37 ÷ 12] x 7 = 12,000.)
(vi) Calculating the amount of the credit or refund
. Using the EM, the amount of
A’s credit or refund is calculated as follows:
2003: $9,000 x .013 = $117 (117÷10 = 11.7) Monthly amount $11.70
2004: $16,000 x .013 = $208 (208÷12 = 17.33) Monthly amount $17.33
2005: $20,000 x .013 = $260 (260÷12 = 21.67) Monthly amount $21.67
2006: $12,000 x .013 = $156 (156÷7 = 22.29) Monthly amount $22.29

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(vii) Reporting the credit or refund amounts on Form 8913
--(A) Because the
credit or refund period does not align with the calendar quarters, Form 8913 requires
taxpayers to report the credit or refund amounts in 13 three-month intervals and one
two-month interval. Thus, A would report credit or refund amounts on Form 8913 as
follows:
March, April, May 2003 - $35.10 (11.70 x 3 = 35.10)
June, July, August 2003 - $35.10 (11.70 x 3 = 35.10)
September, October, November 2003 - $35.10 (11.70 x 3 = 35.10)
December 2003, January, February 2004 - $46.36 (11.70 + [17.33 x 2] = 46.36)
March, April, May 2004 - $51.99 (17.33 x 3 = 51.99)
June, July, August 2004 - $51.99 (17.33 x 3 = 51.99)
September, October, November 2004 - $51.99 (17.33 x 3 = 51.99)
December 2004, January, February 2005 - $60.67 (17.33 + [21.67 x 2] = 60.67)
March, April, May 2005 - $65.01 (21.67 x 3 = 65.01)
June, July, August 2005 - $65.01 (21.67 x 3 = 65.01)
September, October, November 2005 - $65.01 (21.67 x 3 = 65.01)
December 2005, January, February 2006 - $66.25 (21.67 + [22.29 x 2] = 66.25)
March, April, May 2006 - $66.87 (22.29 x 3 = 66.87)
June, July 2006 - $44.58 (22.29 x 2 = 44.58)
(B) After determining the amount of credit or refund using the EM, A reports the
amounts on Form 8913, and attaches the Form 8913 to A’s 2006 federal income tax
return.

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Example 2
. The same facts as Example 1 except that A has 500 employees.
A’s FETP is capped at 1 percent. Thus, A must make the same calculation as in
Example 1
to determine the proper amount of A’s credit or refund of federal
communications excise tax using the FETP of 1 percent, rather than 1.3 percent.
SECTION 13. FORM 1040EZ-T, REQUEST FOR REFUND OF FEDERAL
TELEPHONE EXCISE TAX
Individuals who do not have to file a federal income tax return and who meet the
conditions for requesting a refund of the federal communications excise tax may file
Form 1040EZ-T to request the refund. Individuals requesting a refund of actual
amounts of federal communications excise tax paid must complete Form 8913 and
attach that form to the Form 1040EZ-T.
SECTION 14. MODIFICATION OF PROVISION REGARDING REQUESTS FOR
CREDIT OR REFUND
(a) Present requirement
. Section 5(g) of Notice 2006-50 provides as follows:
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.

(b) Reason for modification
. Many of the pending refund claims that were filed on
or before May 25, 2006, include refund claims for nontaxable service that was billed
before March 1, 2003, and after February 28, 2003. In the interest of sound tax
administration and efficiency, the IRS will process all claims for credit or refund that
were filed on or before May 25, 2006.

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(c) Revised requirement
. Accordingly, section 5(g) of Notice 2006-50 is modified
to read as follows:
(1) Requests that do not follow the provisions of Notice 2006-50 and that were
filed on or before May 25, 2006, will be processed normally.
(2) Requests that were filed on or after May 26, 2006, and do not follow the
provisions of Notice 2006-50, will not be processed to the extent they relate to
the tax paid on nontaxable service that was billed after February 28, 2003.

SECTION 15. EFFECT ON OTHER DOCUMENTS
Notice 2006-50 is amplified, clarified, and modified.
SECTION 16. DRAFTING INFORMATION
The principal author of this notice is Barbara B. Franklin 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 number).