The IRS properly assessed AT&T more than $505 million in taxes from universal service payments made to the company because the funds should be considered income and not capital contributions, a three-judge panel of the 5th U.S. Circuit Court of Appeals in New Orleans ruled last week. AT&T had lost its case on summary judgment at a lower court and appealed, arguing that its money it got from USF was capital contributions that shouldn’t count as gross income for tax purposes. The panel upheld the summary judgment, ruling that under both the relevant statutes and the Supreme Court’s 1973 U.S. v. CB&Q Railroad decision the government’s intentions in handing out the money are determinative. AT&T officials did not respond to a request seeking comment. An FCC spokesman declined to comment. The court’s decision concluded that the transferor didn’t intend the funds to be a contribution to capital, tax expert Rob Willens said. The funds instead were intended to be a supplement to AT&T’s income to compensate it for the lost revenue and increased costs it incurred in serving low-income, high-cost users, he said. Transfer of funds, as the court said, didn’t exhibit the “characteristics” of a contribution to capital as set forth by CB&Q, Willens noted. He said states would also tax these amounts because most, if not all, states use federal taxable income, with certain adjustments, as the tax base.
Federal Universal Service Fund
The FCC's Universal Service Fund (USF) was created by the Telecommunications Act of 1996 to fund programs designed to provide universal telecommunications access to all U.S. citizens. All telecommunications providers are required to contribute a percentage of their end-user revenues to the Fund, which the FCC allocates for four core programs: 1. Connect America Fund, which subsidizes telecom providers for the increased costs of offering services to customers in rural and remote areas 2. Lifeline, which directly subsidizes low-income households to help pay for the cost of phone and internet service 3. Rural Health Care, which subsidizes health care providers to offer broadband telehealth services that can connect rural patients and providers with specialists located farther away 4. E-Rate, which subsidizes rural and low-income schools and libraries for internet and telecommunications costs The Universal Service Administrative Company (USAC) administers the USF on behalf of the FCC, but requires Congressional approval for its actions. Many states also operate their own universal service funds, which operate independently from the federal program.
Interconnected VoIP subscriptions jumped 22 percent to 26 million in 2009, while the number of switched access lines fell 10 percent to 127 million, the FCC said Wednesday in a report on local telephone competition. The number of wireline retail connections fell by 6 percent to 153 million in 2009, the report said. The report may show a decline in the total number of wirelines, but VoIP still relies on wireline broadband connections and many wireless services still rely on wireline facilities, said a spokeswoman for the National Telecommunications Cooperative Association. Policymakers “must make sure that high-cost support mechanisms are available to support the deployment and maintenance of critical network facilities,” she said.
The hiring of Ray Baum to the House Commerce Committee could signal heightened Capitol Hill interest in pursuing Universal Service Fund reform this year, state and industry officials said. Baum was chairman of the Oregon Public Utilities Commission and the state chairman of the Federal-State Joint Board on Universal Service. Some wireline industry lobbyists said they believe Baum may try to revamp the bill worked out last year by Rep. Lee Terry, R-Neb., and former Communications Subcommittee Chairman Rick Boucher, D-Va.
Key parts of the National Broadband Plan still require action by Congress. A potential roadblock for the commission as it implements the plan remains that the commission cannot control if or how quickly Capitol Hill moves forward on its parts.
A top state telecom official will join the House Commerce Committee staff, incoming Chairman Fred Upton, R-Mich., said Wednesday. Ray Baum, chairman of the Oregon Public Utilities Commission and the National Association of Regulatory Utility Commissioners Telecom Committee, will be senior policy adviser for the Communications Subcommittee under Rep. Greg Walden, R-Ore. Meanwhile, Neil Fried -- who was senior minority counsel under Ranking Member Joe Barton, R-Texas -- will stay on the committee as chief counsel of the Communications Subcommittee. As state chair of the Federal-State Joint Board on Universal Service, Baum had been active in efforts to revamp the Universal Service Fund. Rep. Lee Terry, R-Neb., the incoming vice chairman of the Communications Subcommittee, has said he will reintroduce USF legislation early in the session (CD Nov 23 p5). Baum is leaving NARUC and the Oregon PUC, a NARUC spokesman confirmed: “He will be greatly missed, but we wish him the best.”
Verizon Wireless used Alltel’s license to obtain high-cost Universal Service Fund support without getting permission from state regulators, U.S. Cellular, Allied Wireless, Commnet Wireless, and Viaero Wireless said in an ex parte filing published Tuesday. The wireless companies said “the core issue is whether Verizon Wireless was ever properly designated by state authorities” and that using Alltel’s high-cost support caused “ongoing harm … by driving up statewide support levels, causing steep reductions under the cap.” The high-cost issue involves tens of millions, if not hundreds of millions of dollars, in USF support, one industry official said.
A group of small wireless carriers asked the FCC to reject a TracFone petition seeking new rules for eligible telecommunications carriers (ETCs) under the Link-Up program. The Competitive ETC coalition accused TracFone of seeking a competitive advantage. TracFone, which provides pre-paid wireless service, asked the FCC for a ruling that ETCs may not receive support for providing Link-Up benefits unless they routinely charge customers for commencing service, and may not expand services they offer under the program to wireless service without obtaining approval from the proper authority.
The FCC’s proposed mobility fund is too small to help build out 3G broadband for the nation’s under-served areas, T-Mobile, the Rural Telecommunications Group and South Dakota-based Flow Mobile said in comments filed in docket 10-208 and released Friday. Verizon and Windstream disagreed, saying the fund was appropriate. Verizon, in fact, went further and said that not only is the $100-$300 million proposed mobility fund adequate, but the FCC should phase out other support for competitive eligible telecommunications providers.
The FCC would get its full request of $355.5 million for FY 2011 if Congress approves the latest version of its omnibus spending bill, which was released Tuesday. The bill appropriates $41.5 million for the NTIA, including money for oversight of broadband stimulus grants. The bill also includes an Anti-Deficiency Act exemption of interest to the telecom industry. The Universal Service Fund program needs an annual exemption from ADA, which sets accounting rules for federal programs. Due to USF’s unique accounting methodology, the program would technically violate the Act without the exemption, which must be obtained in every budget cycle. Also of interest, the bill prohibits the FCC from adopting a restriction limiting USF funding to primary lines. Senate Democrats hope to move the 1,900-page bill to the floor within the next week.
The FCC won’t have an order ready on reverse auctions for the proposed mobility fund until mid-February at the earliest, Chief Margaret Wiener of the Wireless Bureau’s Auctions & Spectrum Access Division said Monday at a Federal Communications Bar Association lunch. In October, the commission opened a rulemaking on whether it should use between $100 million and $300 million left over in the high-cost Universal Service Fund to create a reverse auction in which wireless companies in underserved areas have a chance to win subsidies to build out 3G networks. The comment period for the current rulemaking closes Dec. 16, and replies are due Jan. 17, Wiener said, making it unlikely that an order will be ready to go out before mid-February.