Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_04-cv-03832/USCOURTS-cand-5_04-cv-03832-1/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 26:6532 IRS: Refund of Tax Penalty

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ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED

E-FILED on 8/5/05

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

HEWLETT-PACKARD COMPANY,

Plaintiff,

v.

UNITED STATES OF AMERICA,

Defendant.

No. C-04-03832 RMW

ORDER GRANTING SUMMARY

JUDGMENT IN FAVOR OF PLAINTIFF

[Re Docket Nos. 21, 34]

Plaintiff Hewlett Packard Company ("HP") moves for summary judgment that it is entitled to a

refund of federal communications excise taxes in the amount of $6,385,671.86 paid by HP and its

predecessor, Compaq Computer Corporation ("Compaq") for taxable quarters ending March 31, 1999

through December 31, 2002. Specifically, it moves for summary judgment that the long distance service

purchased by HP and Compaq is not subject to taxation under 26 U.S.C. §§ 4251 and 4252. The United

States of America ("IRS") opposes the motion and moves for summary judgment against HP. The court

has read the moving and responding papers and considered the arguments of counsel. For the reasons set

forth below, the court grants HP's motion for summary judgment.

I. BACKGROUND

Plaintiff HP is a Delaware corporation with its principal place of business in Palo Alto, California. 

In May 2002, HP acquired Compaq. Brennan Decl. ¶ 3. During the taxable period from January 1, 1999

though December 31, 2002, HP and Compaq purchased telecommunications services pursuant to

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ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 2

contracts with AT&T, MCI, and Sprint. In accord with the terms of these contracts, HP and Compaq

were charged on a per-minute basis for elapsed transmission time. The charges did not depend on the

distance of each communication. Blesi Decl. ¶¶ 3-5; Webb Decl. ¶¶ 2-4. The contracts did not entitle HP

and Compaq to make an unlimited number of calls within a specified geographic region for a flat or periodic

fee. Blesi Decl. ¶ 6; Webb Decl. ¶ 6.

HP paid federal communications excise taxes of $4,560,280.91 for taxable periods from July 1,

1999 though June 30, 2002. On June 14, 2002, HP filed timely claims for refunds, which were denied. 

Brennan Decl. ¶¶ 6-7. Compaq paid communications excise taxes of $1,825,390.95 for taxable periods

from January 1, 1999 though December 31, 2002. Webb Decl. ¶ 7. On February 25, 2002 and March

14, 2003, Compaq filed timely claims for refunds, which were denied. Brennan Decl. ¶¶ 8-9. 

On October 18, 2004, HP filed an amended complaint seeking a refund in the amount of

$6,385,671.86 for the total amount of disputed excise taxes paid by HP and Compaq plus statutory

interest. The IRS filed a timely answer to the amended complaint denying plaintiff's entitlement to the

refund.

II. ANALYSIS

The IRS arguesthat the telephone services purchased byHP and Compaq during the taxable periods

referenced above were subject to an excise taxeither as "tolltelephone service" in accord with either Internal

Revenue Code section 4252(b) or as "local" service in accord withsection4252(a). 26 U.S.C. § 4252. HP

argues that the services purchased were not subject to the excise tax because they constituted neither "toll

telephone service" nor "local" service within the meaning of the statute. Both parties move for summary

judgment.

A. Standards

Summary judgment is proper when there are no genuine issues asto any material fact and the moving

party is entitled judgment as a matter of law. See Fed R. Civ. P. 56(c). The parties agree that there are no

genuine issues of material fact in dispute, and move for summary judgment based on the applicable statutes.

Statutory interpretation is a question of law:

[S]tatutory ambiguity cannot be determined by referring to the parties'

interpretations ofthe statute. Ofcourse their interpretations differ.That iswhythey

are in court. . . . Whether a statute is ambiguous is a pure question of law to be

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ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 3

determined by the courts, however, not by the parties or by an administrative

agency.

John v. United States, 247 F.3d 1032, 1041 (9th Cir. 2001) (citations omitted).

B. Statutory Definition of "Toll Telephone Service"

Section 4252(b) defines "toll telephone service" as follows:

(1) a telephonic quality communication for which (A) there is a toll charge which

variesinamount withthe distance and elapsed transmissiontime of eachindividual

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 oftotalelapsed transmissiontime),

to the privilege of anunlimited number oftelephonic communications to orfromall

or a substantialportionofthe 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).

HP arguesthat the long distance services purchased byitself and Compaq are notsubject ot the excise

tax because they do not constitute "toll telephone service" under either definition: first, because the charges

imposed on the services did not vary based on distance, as required by the plain language of section

4252(b)(1), and second, because the services at issue were not flat-rated for unlimited usage as required by

section 4252(b)(2).

1. Section 4252(b)(1)

HP argues that within the plain meaning of section 4252(b)(1), the word "and" is unambiguous,

therefore charges must vary based on both elapsed time and distance in order to be taxable. See

American Bankers Ins. Group v. United States, 408 F.3d 1328, 1333 (11th Cir. 2005). HP argues that

since the charges to HP and Compaq did not vary based on distance, they do not constitute "toll telephone

service" within the meaning of the code and are therefore not subject to the excise tax. 26 U.S.C. §

4252(b)(1).

The IRS argues that the word "and" is ambiguous, and may be read disjunctively as a "reference to

either or both of two alternatives." Webster's Third New International Dictionary 80 (1966). Thus, the

IRS argues, "in the construction of statutes, it is the duty of the court to ascertain the clear intention of the

legislature. In order to do this, courts are often compelled to construe 'or' as meaning 'and,' and again 'and'

as meaning 'or.'" United States v. Fisk, 70 U.S. 445, 447 (1865). The IRS urges the court to follow the

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1 See Office Max, Inc. v. United States, 309 F. Supp. 2d 984 (N.D. Ohio 2004); Fortis,

Inc. v. United States, 2004 WL 2085528 (S.D.N.Y. 2004); Nat'l RR Passenger Corp. v. United

States ("Amtrak"), 338 F. Supp. 2d 22 (D.D.C. 2004); Reese Brothers, Inc. v. United States, 2004

WL 2901579 (W.D. Pa. 2004); Honeywell Int'l, Inc. v. United States, 64 Fed. Cl. 188 (2005);

America Online, Inc. v. United States ("AOL"), 64 Fed. Cl. 571 (2005). In all six cases, the court

granted the taxpayer's motion summary judgment, holding that the plain meaning of section 4252(b)(1) is

that charges must vary with both distance and elapsed time to be taxable. Plaintiff notes that the Fortis

court denied summary judgement for the taxpayer based on inbound service. In American Bankers Ins.

Group v. United States, the district court granted summary judgment in favor of the IRS, 308 F. Supp. 2d

1360 (S.D. Fla. 2004), but was recently reversed on appeal, 408 F.3d 1328 (11th Cir. 2005).

ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 4

reasoning of Slodov v. United States, in which the court held that the word "and" could be read either

conjunctively or disjunctively with regard to another portion of the Internal Revenue Code and then rejected

the taxpayer's conjunctive reading of "and" as inconsistent with the statute's purpose. 436 U.S. 238, 247

(1978).

This court agrees with the numerous other courts that have held the word "and" in section

4252(b)(1) is unambiguously conjunctive.1 

Unlessthe context dictates otherwise, the word 'and' is presumed to be used inits

ordinary sense, that is, conjunctively. Crooks v. Harrelson, 282 U.S. 55, 58

(1930) (construing the tax statute and concluding that 'nothing in the context or in

other provisions ofthe statute warrant the conclusionthat the word 'and was used

otherwise than in its ordinary sense [, conjunctively]; and to construe the clause

[disjunctively,] would be to add a material element . . ., and therebyto create, not

to expound, a provisionoflaw'). . . . [T]here is nothing in the statutory context [of

section 4252(b)(1)] to suggest that 'and' is used in the provision as meaning 'or.'

The phrase is unambiguous. The plain meaning is clear – 'and' is used

conjunctively. 

American Bankers, 408 F.3d at 1332.

The IRS also argues that the word "distance" is ambiguous in the statute and may be synonymous

with "toll rate." Opp. at 8-9. However, as plaintiff notes, the IRS later acknowledges that at the time

section 4252(b)(1) was enacted, "distance" and conjunctively "elapsed time" were used to calculate the toll

charge:

In 1965, the charge for all long-distance calls, other than WATS calls, was

calculated by multiplying a distance toll rate (derived from mileage bands that the

call crossed) and the elapsed transmission time of the call. . . . [V]ariation in

distance alone would not necessarily have caused a variation in charge. The

variationbetweenchargesresults from the product ofthe distance tollrate and the

elapsed transmission time as a mathematical function, not from a variation in the

distance or in the distance toll rate. 

Opp. at 10. Because the IRS acknowledges that distance was a factor used to calculate the "toll rate," it

does not follow that "distance" is synonymous with "toll rate."

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ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 5

The IRS argues next that the statute's purpose and legislative history demonstrate the disputed

services were a "toll telephone service." Because the statute is unambiguous, the court need not inquire

further as to the purpose or intent of Congress: "Where the statutory text is unambiguous the inquiry ends." 

American Bankers, 408 F.3d at 1333 (citing BedRoc Ltd., LLC v. United States, 541 U.S. 176, 183

(2004)). 

Nevertheless, the court is persuaded that the legislative history supports its present holding. As

noted in American Bankers, "Congress was seeking to modify and narrow the definition and to phase this

excise tax out entirely by 1969. Congress could have amended the language in 1965 to include broad

terms able to adapt to technological changes; instead, Congress specifically defined 'toll telephone service'

with an eye toward the tax expiring four years later." 408 F.3d at 1333; see also Office Max, 309 F.

Supp. 2d at 1000 ("The Court must presume that Congress meant what it said when it tailored the definition

of taxable 'toll telephone service' to include distance and time requirements, particularly in light of the overall

goal of the [1965] Act to reduce and restrict the application of federal excise taxes.").

Next, the IRS argues that Revenue Ruling 79-404, which supports a disjunctive interpretation of

the word "and," should be given Chevron deference in interpreting section 4252(b)(1). Plaintiff counters

that Revenue Ruling 79-404 disregards the plain language of section 4252(b)(1) and therefore is not

entitled to deference. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837,

842-43 (1984). 

Under Chevron, if the congressional intent is clear, the inquiry ends: "If the intent of Congress is

clear, that is the end of the matter; for the court, as well as the agency, must give effect to the

unambiguously expressed intent of Congress." Chevron, 467 U.S. at 842-43. Only if the statute is silent

or ambiguous, does the court move on to evaluate agency interpretation. Id. Since the court has

concluded the statute is unambiguous, it need not give deference to Revenue Ruling 79-404, nor determine

the proper level of deference. American Bankers, 408 F.3d at 1335.

Finally, the IRS argues that even if the telephone services provided were not within the express

terms of the statute, Congress should be deemed to have intended it so based on the Reenactment

Doctrine. The Reenactment Doctrine states that longstanding IRS and Treasury interpretations of the Code

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28 2 Office Max, 309 F. Supp. 2d 984, 1005; Fortis, Inc, 2004 WL 2085528, *11-12; Reese

Brothers, Inc., 2004 WL 2901579, *11; Honeywell Int'l, Inc., 2005 WL 375601, *8; AOL, 64 Fed.Cl.

at 581; and American Bankers, 408 F.3d at 1335-36.

ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 6

are entitled to great deference when Code provisions they interpret have been re-enacted by Congress. 

United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001). 

Plaintiff counters that the Reenactment Doctrine is not applicable because the statutory language at

issue is unambiguous. "In determining whether a particular regulation carries out the congressional mandate

in a proper manner, we look to see whether the regulation harmonizes with the plain language of the statute,

its origin, and its purpose." National Muffler Dealers Ass'n, Inc. v. United States, 440 U.S. 472, 477

(1979). See also Peoples Federal Sav. and Loan Ass'n of Sidney v. C.I.R., 948 F.2d 289, 302 (6th

Cir. 1991) ("The re-enactment doctrine is merely an interpretive tool fashioned by the courts for their own

use in construing ambiguous legislation. It is most useful in situations where there is some indication that

Congress noted or considered the regulations in effect at the time of its action.").

The IRS contends that after Revenue Ruling 79-404 was published, Congress extended and then

made permanent the provisions of the 1965 Act taxing local and toll telephone service. Opp. at 16-17. 

Plaintiff contends there is no indication in the legislative history that Congress was aware of Revenue Ruling

79-404 at the time of re-enactment:

[T]he reenactment doctrine cannot alter the plain meaning of the statute, and,

moreover, there is nothing to indicate the Congress adopted, tacitly or otherwise,

the interpretationpresented in Revenue Ruling 79-404. The Revenue Rulingwas

limited to the narrow issue of ship-to-shore communications, and there is no

evidence that the Ruling was ever cited or applied between 1979 and the latest

congressional reenactment in 1998. While the Ruling was issued over twenty

years ago, it is not comparable o the longstanding treasury regulations in

Cleveland Indians Baseball and College Savings. Ultimately, there is no

indication that Revenue Ruling 79-404 was brought to the attention of Congress

or thatCongressinany subsequent reenactmentsconsideredthe questioninvolved

in the Ruling.

Fortis, 2004 WL 2085528 at *12. The court also notes that in Cleveland Indians, the plain language of

the statute and the regulation at issue were not incompatible. Cleveland Indians Baseball Co., 532 U.S.

at 220. 

The court's conclusion is in accord with the six other courts that have held that the Reenactment

Doctrine does not apply to section 4252(b)(1)2:

[N]ot only isthe statutorylanguage clear under § 4252(b)(1), but there is nothing

to indicate thatCongresswasawareofRevenue Ruling79-404, 1979-2C.B. 382

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28 3 See also Technical Advice Memorandum 199923002 (February 19, 1999); Technical

Advice Memorandum 97100003 (November 19, 1996); and Technical Advice Memorandum

2000009005 (November 8, 1999).

ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 7

when it subsequently amended and re-enacted this taxing statute. The legislative

historyreveals no mentionofRevenue Ruling79-404, 1979-2C.B. 382 nor does

the record reveal consideration of the issue raised in the Ruling. See, e.g., Office

Max, 309 F.Supp. 2d at 1004-1005. Thus, there is nothing to indicateCongress

was aware of Revenue Ruling 79-404, 1979-2 C.B. 382 when the taxing

provisions were re-enacted. 

American Bankers, 408 F.3d at 1335-36.

2. Section 4252(b)(2)

The IRS argues in the alternative that the communications service provided to HP and Compaq

constitutes "toll telephone service" within the meaning of section 4252(b)(2) because it (1) provides the right

to an unlimited number of calls to points in a specified area outside the local telephone system area, and (2)

is subject to charge that is both periodic and determined either as a flat amount or upon the basis of total

elapsed transmission time.

HP counters that the services did not allow either company to make unlimited calls for a flat amount

or periodic charge. Blesi Decl. ¶ 6; Webb Decl. ¶ 6. The services were not billed as a flat rate, but were

charged based on the duration of each call. Blesi Decl. ¶ 5; Webb Decl. ¶ 5. Thus, plaintiff argues, the

services do not constitute "toll telephone service" by the IRS's own definition:

Taxpayer argues that it purchasesservices described in § 4252(b)(2). Taxpayer

emphasizes that the charge for each services is based upon total elapsed

transmission time as used in the parenthetical in § 4252(b)(2). However, the

charges for services are determined on the basis of the duration of each call.

Unlike local service, Taxpayer does not pay a fixed amount in advance for an

unlimited number of calls. Thus, the Services are similarto the service in Revenue

Ruling 79-404 that was held to be described in §4252(b)(1), not §4252(b)(2).

That is, the Services in question do not entitle Taxpayerto anunlimited number of

calls to a specified area for which a charge is made based on flat fee or elapsed

transmission time, but rather provide Taxpayer with telephone service for which

Taxpayer is charged an amount that varies based upon the duration of each call.

IRS National Office Technical Advice Memorandum 200227008 (March 8, 2001).3

There is no dispute, and the service contracts reflect, that HP and Compaq were charged based on

the duration of each call. Blesi Decl., Ex. A; Webb Decl., Ex. A. Thus, the services did not constitute "toll

telephone service" within the meaning of section 4252(b)(2). 

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ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 8

C. Applicability of Section 4252(a) "Local Telephone Service"

The IRS argues that if this court were to conclude that the services are not "toll telephone service,"

then they are taxable as local telephone service, because the system accessed by HP and Compaq was

arguably "local" in that they are not specifically excluded by the statute, which was "obviously designed to

be comprehensive." Opp. at 22. Section 4252(a) defines "local telephone service" as follows:

(1) the access to a local telephone system, and the privilege of telephonic quality

communication with substantially all persons having telephone or radio telephone

stations constituting a part of such local telephone system, and

(2) any facility or service provided in connection with a service described in

paragraph (1). 

The term "local telephone service" does not include any service which is a "toll

telephone service"or a "private communication service" as defined in subsections

(b) and (d).

26 U.S.C. § 4252(a).

Plaintiff counters with two arguments supported by recent court decisions on this matter: (1) "'The

fact that certain exemptions are specified does not mean that anything not expressly exempted is taxed,'"

American Bankers, 408 F.3d at 1338 (quoting AOL, 64 Fed. Cl. at 582-83); and (2) the IRS's

interpretation is at odds with the plain meaning of the statute. Fortis, 2004 WL 2085528 at *15 ("It is

hardly a plain or natural reading of the statute to claim that the entire United States is part of one 'local

telephone system.'"); Honeywell, 64 Fed. Cl. at 203 (same); Office Max, 309 F. Supp. 2d at 1007

("[T]here is no basis upon which to find that the long-distance service at issue herein falls within the

statutory definition of 'local telephone service.'"). "It is inconceivable that Congress considered a

nationwide telecommunications network to be 'local.' The text of the statute belies such an interpretation."

Amtrak, 338 F.Supp.2d at 30.

The court agrees with the reasoning of numerous other courts that the plain language of section

4252(a) does not support the IRS's argument that the nationwide and international service at issue is "local." 

Therefore, the statute does not apply to the disputed services.

III. ORDER

For the foregoing reasons, the court GRANTS HP's motion for summary judgment of liability

against the IRS. The parties shall confer regarding the total amount to which HP is entitled and, if possible, 

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ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 9

stipulate as to the amount to which HP is entitled. After the damages issue is resolved, the court will enter a

final judgment.

DATED: 8/5/05 /s/ Ronald M. Whyte

RONALD M. WHYTE

United States District Judge

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ORDER GRANTING PLAINTIFF SUMMARY JUDGMENT— C-04-03832 RMW

JED 10

Notice of this document has been electronically sent to:

Counsel for Plaintiff(s):

Leslie Holmes lholmes@hoganlaw.com 

Mark Vincent Boennighausen mvb@hoganlaw.com 

Thomas R. Hogan trh@hoganlaw.com 

Counsel for Defendant(s):

David L. Denier david.denier@usdoj.gov 

Counsel are responsible for distributing copies of this document to co-counsel that have not registered for

e-filing under the court's CM/ECF program.

Date: 8/5/05 /s/ MAG

Chambers of Judge Whyte

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