Golden Belt Tel. Ass’n v. Commissioner, 108 T. C. 498 (1997)

Income from billing and collection services provided by a telephone cooperative to long-distance carriers is considered “communication services” and thus excluded from the 85% member income test for tax exemption under Section 501(c)(12).

Summary

Golden Belt Telephone Association, a rural telephone cooperative, sought to maintain its tax-exempt status under Section 501(c)(12) of the Internal Revenue Code. The issue was whether income from billing and collection (B&C) services provided to nonmember long-distance carriers should be considered “communication services” and thus excluded from the 85% member income test. The Tax Court held that B&C services are indeed communication services, following the Federal Communications Commission’s (FCC) reversal of its earlier stance. This ruling allowed the cooperative to remain tax-exempt as the income from B&C services was not counted towards the 85% threshold.

Facts

Golden Belt Telephone Association, Inc. , a Kansas rural telephone cooperative, provided local and long-distance services to its members. It also performed billing and collection (B&C) services for long-distance carriers, which included recording call data, billing members for both local and long-distance calls, collecting payments, and handling inquiries. The cooperative retained a portion of the long-distance charges as compensation for these services. Following the 1984 AT&T divestiture, the FCC initially classified B&C services as “financial and administrative,” but later reversed this decision in 1992, categorizing them as communication services.

Procedural History

The Commissioner of Internal Revenue determined deficiencies in Golden Belt’s federal income taxes for 1991, 1992, and 1993, asserting that B&C income should be included in the 85% member income calculation, potentially disqualifying the cooperative from tax-exempt status. Golden Belt moved for summary judgment, arguing that B&C services were communication services and should not be counted towards the 85% test. The Commissioner filed a motion for partial summary judgment, contending the opposite. The Tax Court granted Golden Belt’s motion and denied the Commissioner’s, ruling in favor of Golden Belt.

Issue(s)

1. Whether income received by a local telephone cooperative from nonmember long-distance carriers for billing and collection services qualifies as income from “communication services” under Section 501(c)(12)(B)(i) of the Internal Revenue Code.

Holding

1. Yes, because billing and collection services are integral to the cooperative’s provision of telephone services and fall within the FCC’s definition of communication services, as clarified in the 1992 FCC decision.

Court’s Reasoning

The court’s decision hinged on the evolving definition of “communication services” by the FCC. Initially, B&C services were considered financial and administrative, but the FCC’s 1992 ruling clarified that these services were indeed communication services, integral to the provision of interstate telephone services. The court noted that only local cooperatives could perform certain B&C functions, such as recording call data and disconnecting service for nonpayment, distinguishing these services from those that could be performed by non-telephone entities. The court rejected the IRS’s reliance on a Technical Advice Memorandum (TAM) that had been based on an outdated FCC ruling, emphasizing the FCC’s expertise in the field and its more recent and authoritative stance on B&C services as communication services. The court also dismissed the IRS’s argument that B&C services lacked a connection to call completion, highlighting the essential nature of these services to the overall telephone service provision.

Practical Implications

This decision clarifies that income from billing and collection services provided by telephone cooperatives to nonmember long-distance carriers is not to be included in the 85% member income test for tax exemption under Section 501(c)(12). This ruling has significant implications for other telephone cooperatives, allowing them to maintain their tax-exempt status even when providing B&C services. It also underscores the importance of following the FCC’s interpretations in tax matters related to communication services. Practically, this means that cooperatives can continue to offer these services without jeopardizing their tax-exempt status, potentially affecting how they structure their operations and financial arrangements with long-distance carriers. The decision may influence future cases involving the classification of services related to telecommunications and could prompt the IRS to revisit its policies on similar issues.