108 T.C. No. 23

UNITED STATES TAX COURT

GOLDEN BELT TELEPHONE ASSOCIATION, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21677-95. Filed June 16, 1997.

P is a rural telephone cooperative corporation

that operates at cost. In addition to local telephone

service it provides its members with long-distance

service through connection with long-distance or

interstate (interexchange) carriers. P performs socalled "billing and collection" (B & C) services in

respect of calls placed through such carriers. The 

B & C services consist of recording data with respect

to members' long-distance calls, such as date, time,

destination, and duration of each call, answering and

resolving questions of members relating to their longdistance bills, etc., and sending a single monthly

telephone bill to each member including charges for

both local and long-distance calls. Upon collection of

such charges it remits to the interexchange carrier an

appropriate portion of the amount paid for longdistance calls. By retaining the remainder it is thus

compensated by the long-distance carrier for providing

B & C services.
2

Held, the income thus received from the longdistance carriers for B & C services is income for the

performance of "communication services" within sec.

501(c)(12)(B)(i), and is therefore not taken into

account to comply with the "85 percent or more"

requirement of sec. 501(c)(12)(A). Accordingly, since

P is otherwise exempt from taxation under sec. 501(a),

it does not lose that exempt status.

Raymond P. Wexler, Todd F. Maynes, James M. Caplinger, and

Mark E. Caplinger, for petitioner.

Robin W. Denick, Elizabeth Purcell, and Robert M. Fowler,

for respondent.

OPINION

RAUM, Judge: The Commissioner determined deficiencies of

$170,686, $164,484, and $90,241 in petitioner's Federal income

taxes for 1991, 1992, and 1993, respectively. Petitioner, Golden

Belt Telephone Association, Inc., has filed a Motion for Summary

Judgment. The facts are not in dispute; the Government "does not

take issue with petitioner's statement of Uncontested Facts" set

forth in petitioner's motion, and adopted those facts in its own

"Motion for Partial Summary Judgment". Nor has the Government

disputed any facts stated in the "Preliminary Statement" of

petitioner's motion. At issue is whether income received by a

local telephone cooperative allocable to billing and collection

services performed in respect of long-distance calls qualifies as

income received for the performance of "communication services"
3

1 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.

2 Sec. 501 provides:

(a) Exemption From Taxation.--An organization described in

subsection (c) or (d) or section 401(a) shall be exempt from

taxation under this subtitle * * *

* * * * * * *

(c) List of Exempt Organizations.--The following

organizations are referred to in subsection (a):

* * * * * * *

(12)(A) * * * mutual or cooperative telephone companies

* * * but only if 85 percent or more of the income consists

of amounts collected from members for the sole purpose of

meeting losses and expenses.

(B) In the case of a mutual or cooperative

telephone company subparagraph (A) shall be

applied without taking into account any income

received or accrued--

(i) from a nonmember telephone

company, for the performance of

communication services which

involve members of the mutual or

cooperative telephone company,

under section 501(c)(12)(B)(i),1 thus resulting in petitioner's

classification as an exempt corporation under section 501(a).2

Petitioner is a Kansas rural telephone cooperative

corporation. It was formed in January 1953 to provide

telecommunication services to its members. 

During 1991, 1992, and 1993, petitioner operated on a

cooperative basis to provide exchange and interexchange

telecommunications service to residences and businesses in its
4

certified areas granted by the State Corporation Commission of

Kansas (KCC). As a cooperative corporation, petitioner operates

at cost by allocating to its members any net margins in the form

of capital credits each year. During the taxable years,

petitioner provided telephone service to approximately 3,500

members, who were located across approximately 2,300 square miles

of central and western Kansas. 

The billing and collection services (B & C services) consist

of the following:

a. Recording. Petitioner records data with respect to

members' long-distance calls, such as the date and time when the

call is made, the destination of the call, and the duration of

the call.

b. Billing and Collection. Petitioner sends a single

monthly telephone bill to each member that includes charges for

both local and long-distance calls. Upon collection of such

charges, it remits to the interexchange carrier an appropriate

portion of the amount paid for long-distance calls. In the event

that one of petitioner's members fails to make payment on its

long-distance telephone bill, petitioner is permitted to

disconnect the telephone service of the nonpaying member under

rules of the KCC. 

c. Inquiry. Petitioner answers inquiries from its members

with respect to long-distance calls, and resolves questions and

concerns regarding their long-distance telephone bills, calls,

and services.
5

Petitioner has performed B & C services since it was formed

in 1953. Prior to the divestiture of AT&T in 1984, petitioner

did not separately account for the costs attributable to B & C

services. Rather, these costs were included in a single

aggregate account with all of petitioner's costs of providing

telephone service to its members. Petitioner was then

compensated by the long-distance carrier for all such costs by

retaining an appropriate portion of the toll rates paid by

petitioner's members for long-distance calls. 

As a result of the divestiture, the Federal Communications

Commission (FCC) revised the accounting requirements for

telephone cooperatives. Under the new system, billing and

collection revenues were required to be reported separately from

other income sources. Petitioner's operating methods and sources

of revenue remained the same. 

Under section 501(c)(12), a cooperative telephone company

qualifies as a tax-exempt entity if at least "85 percent * * * of

the income consists of amounts collected from members for the

sole purpose of meeting losses and expenses." In determining

whether a telephone cooperative has satisfied the 85-percent

test, section 501(c)(12)(B) provides that income received "from a

nonmember telephone company, for the performance of communication

services which involve members" of the cooperative shall not be

taken into account. At issue here is whether B & C services are

"communication services" within section 501(c)(12)(B). If so,
6

the amount of petitioner's gross income would without dispute

satisfy the 85-percent test for each of the years involved, and

petitioner is qualified as a tax-exempt entity. As a result,

petitioner would be entitled to summary judgment with respect to

the deficiencies determined by the Commissioner. The deficiency

notice contains a number of adjustments, all of which would

become irrelevant if petitioner were held to be a tax-exempt

corporation.

1. History

"Communication services" is not defined in the Code or the

Regulations. However, the history of the treatment of telephone

cooperatives gives some insight into whether "communication

services" include B & C services.

In Rev. Rul. 74-362, 1974-2 C.B. 170, 171, the IRS ruled

that amounts due a cooperative telephone company for services

rendered to a nonmember long-distance company must be treated as

nonmember income under the 85-percent test. Section 501(c)(12)

provided, as it does now, that a mutual or cooperative telephone

company was tax exempt "only if 85 percent or more of the income

consists of amounts collected from members for the sole purpose

of meeting losses and expenses." As a result of the ruling, most

telephone cooperatives stood to lose their tax-exempt status.

In response, Congress added subparagraph B to section

501(c)(12). In the legislative history of section 501(c)(12)(B),
7

3 There is no explanation for the use of the term

"communication services" rather than "call-completion services"

in sec. 501(c)(12)(B).

the change is explained by the Senate Finance Committee as

follows:

The committee believes that the performance by a

telephone cooperative of call-completion services

involving calls to or from members of the cooperative

is substantially related to the cooperative's

performance of its statutory exempt function, and hence

that actual or constructive "payments" from another

telephone company for such services should not

disqualify otherwise eligible telephone cooperatives

from tax-exempt status.

The committee understands that the approach set

forth in the Service's ruling, described above, might

well make the statutory exemption provision into a

"dead letter," since few, if any, telephone

cooperatives could prove that the constructive

"payments" hypothesized by the Service do not cause the

telephone cooperative to fail the 85-percent memberincome test.

S. Rept. 95-762 (1978) at 2-3, 1978-2 C.B. 357, 358. Prior to

the 1984 AT&T divestiture, "call-completion services" included 

B & C services.3

In 1986, the FCC issued a decision, In the Matter of

Detariffing of Billing & Collection Servs., 102 FCC2d 1150 (1986)

(1986 Detariffing Order), which resulted in the detariffing of 

B & C services under Title II of the Communications Act of 1934,

ch. 652, tit. I, sec. 1, 48 Stat. 1064, 47 U.S.C. sec. 151 et

seq. (1937). In the 1986 Detariffing Order, the FCC concluded

that B & C services performed for a non-member long-distance

company were not a "communication service", but were instead a
8

"financial and administrative service." In the Matter of

Detariffing of Billing & Collection Servs., 102 FCC2d at 1168. 

Therefore, the FCC would not regulate B & C services under Title

II of the Communications Act. Id. at 1169.

In reliance upon the 1986 Detariffing Order, the IRS ruled

in Tech. Adv. Mem. 91-11-001 (Apr. 23, 1989) (the TAM), that B

& C services were not "communication services" for purposes of

section 501(c)(12)(B). The issue in the TAM was whether an

exempt telephone cooperative's revenues, including B & C

revenues, should be treated as member income, nonmember income,

or excludable income under section 501(c)(12)(B). Id. The TAM

chronicled the treatment B & C services had received from the FCC

since the divestiture of AT&T in 1984. At first, the FCC

regulated the rate of return for B & C services that local

cooperatives offered to long-distance carriers. However, in a

1985 Detariffing Notice, the FCC

tentatively concluded that third-party billing and

collection was "essentially a financial and

administrative service," not "inherently a

communications service" and accordingly proposed to

"detariff" billing and collection provided to third

parties. * * *

Id. In 1986, the FCC cemented its conclusion of 1985 and

determined that B & C services were not "inherently a

communications service" under Title II of the Communications Act. 

Id. The FCC also required separate accounts for B & C revenues. 

Id.
9

Based on the 1985 Detariffing Notice, the 1986 Detariffing

Order, and the changed accounting system, the TAM concluded

that the billing and collection function is a

"financial and administrative service." The functions

comprising billing and collection (data processing,

creating, mailing and collecting invoices), are common

accounting functions, not unique to the telephone

industry. * * * A "financial and administrative

service" which credit card companies can perform as

ably as LECs [local exchange carriers], cannot be a

"communication service involving the completion of long

distance calls." Treas. Reg. sec. 1.501(c)(12)-1(c). 

* * * [Fn. ref. omitted.] 

Id. Because the IRS concluded in the TAM that telephone

cooperatives provide B & C services in the same manner as other

nonexempt organizations, it ruled that B & C income is unrelated

trade or business income of the cooperative. Id. Recognizing

that the TAM "may have caused the inadvertent disqualification of

many telephone companies from tax exempt status", the IRS, in

Notice 92-33, 1992-2 C.B. 363, indicated that it would apply the

new provisions of the TAM for tax years beginning after December

31, 1990. Thus, the IRS seeks to apply the TAM for the years at

issue here, namely, 1991, 1992, and 1993.

Meanwhile, in 1989, the FCC issued another decision, In the

Matter of Pub. Serv. Commn. of Md., 4 FCC Rcd 4000 (1989) (1989

FCC Decision), in which it softened the position it had taken in

the 1986 Detariffing Order. The decision stated:

Billing and collection services of the kind

provided by C&P for AT&T directly affect the conditions

under which interstate carriers offer transmission

services. The rates that LECs [local exchange

carriers] charge for billing and collection directly

affect the costs of providing interstate transmission
10

service and hence the rates that IXCs [interexchange or

long-distance carriers] must charge their interstate

customers. Moreover, * * * DNP [disconnection for

nonpayment] is integral to the billing and collection

service that C&P provides to interstate carriers. * * *

 Finally, * * * AT&T must rely on the LECs to

perform recording of call detail information * * *. 

* * * IXCs cannot, as a practical matter, offer

interstate telephone service without obtaining recorded

call detail information sufficient to collect payment

from customers * * * .

Besides "affecting" interstate communications, the

billing and collection service that C&P provides for

AT&T are also "closely related to the provision of

[such] services," since billing and collection must

occur accurately and efficiently for an interstate

carrier to offer its services on an economically sound

basis. From a technical perspective, DNP and the call

detail recording function are two integral components

of the billing and collection services that C&P

provides to interstate carriers that are closely

related to the interstate communication services of

those carriers. DNP and recording are each performed

as a function of the LECs' provision of interstate

communications service * * * that other, non-carrier

vendors of billing and collection services cannot

provide.

* * * When one interstate carrier is performing

billing and collection for the interstate services of

another interstate carrier under circumstances like

those involved in C&P's relationship with AT&T the

billing and collection service is incidental to

interstate communications and subject to our Title I

jurisdiction. [Fn. ref. omitted; emphasis supplied.]

4 FCC Rcd at 4005.

Finally, in 1992, the FCC formally reversed the position it

had taken in the 1986 Detariffing Order. In In the Matter of

Policies and Rule Concerning Local Exchange Carrier Validation

and Billing Information for Joint Use Calling Cards, 7 FCC Rcd

3528 (1992) (1992 FCC Decision), the FCC stated affirmatively
11

that B & C services are "communication services." The FCC

explained the change as follows:

We recognize that in the Billing and Collection

Detariffing Order, the Commission found that LEC

billing and collection for an unaffiliated IXC is "not

a communication service for purposes of Title II of the

Communications Act," but rather, "is a financial and

administrative service." * * * Nevertheless, in

recognizing its Title I ancillary jurisdiction over

billing and collection services, the Commission found

that such services were "incidental" to the

transmission of wire communications and thus fell

within the meaning of "wire communication" as defined

in Section 3(a) of the Act. * * * These two findings

appear inconsistent. Upon further analysis, we believe

that the latter conclusion, that billing and collection

is incidental to the transmission of wire communication

and thus is properly considered a communications

service under Section 3(a) of the Act, is the correct

one. Billing and collection, of course, remains

outside the scope of Title II because it is not a

common carrier service. * * * [Emphasis supplied.]

7 FCC Rcd at 3533 n. 50.

The Tenth Circuit, which includes Kansas, has acknowledged

the 1992 FCC Decision. In Mical Communications, Inc. v. Spring

Telemedia, Inc., 1 F.3d 1031, 1039 (10th Cir. 1993), the court

stated that the FCC "appeared in that order, however, to retreat

from its characterization of billing and collection by LECs as

merely a 'financial and administrative' service." 

2. Analysis

In 1934, Congress created the Federal Communications

Commission

For the purpose of regulating interstate and foreign

commerce in communication by wire and radio so as to

make available, so far as possible, to all the people

of the United States a rapid, efficient, Nation-wide,

and world-wide wire and radio communication service 
12

* * *.

47 U.S.C. sec. 151 (1991). Included in the FCC's jurisdiction is

"telephone exchange service", defined as

service within a telephone exchange, or within a

connected system of telephone exchanges within the same

exchange area operated to furnish to subscribers

intercommunicating service of the character ordinarily

furnished by a single exchange * * *.

47 U.S.C. sec. 153(47) (1996). 

The phrase "communication service" is not defined in the

Communications Act, but it is used in the paragraphs describing

the purpose of the FCC and the definition of "telephone exchange

service". It is also used in Title II of the Communications Act,

which describes common carriers. Section 201(a) of 47 U.S.C.

makes it

the duty of every common carrier engaged in interstate

or foreign communication by wire or radio to furnish

such communication service upon reasonable request

therefor * * * [Emphasis supplied.]

47 U.S.C. sec. 201(a) (1991). Section 201(b) provides that:

All charges, practices, classifications, and

regulations for and in connection with such

communication service, shall be just and reasonable 

* * * [Emphasis supplied.]

47 U.S.C. sec. 201(b) (1991).

When Congress enacted the current Code section 501(c)(12),

it incorporated the term "communication services" into the

statute. Although there is nothing explicitly linking the

definition in section 501(c)(12) to the Communications Act or the

FCC, the FCC has defined what is a communication service, at
13

least in terms of B & C services, for over a decade without any

Congressional action. In addition, the IRS itself relied heavily

on the FCC 1986 Detariffing Order to craft its position. In

Tech. Adv. Mem. 91-11-001, the FCC is the sole authority for the

IRS' position that B & C services are not communication services. 

Id.

In 1992, the FCC stated unequivocally that B & C services

are "properly considered a communication service". In the Matter

of Policies and Rule Concerning Local Exchange Carrier Validation

and Billing Information for Joint Use Calling Cards, 7 FCC Rcd

3528, 3533 n.50 (1992). The Government's only direct authority

for its contrary position in Tech. Adv. Mem. 91-11-001 was the

FCC's 1986 Detariffing Order. In 1992 the FCC acknowledged that

its prior position was incorrect. There is no authority in

conflict with the latter FCC position. To be sure, we are called

upon here to interpret the Internal Revenue Code, not some other

statute. Nevertheless, in the context of the matter before us,

there is nothing to indicate that the definition of

"communication services" in section 501(c)(12) should be treated

differently from "communication services" in the Communications

Act. We hold that "communication services" in section

501(c)(12)(B) includes B & C services.
14

4 We note that the IRS has very recently issued another

technical advice memorandum, Tech. Adv. Memo. 97-22-006 (May 30,

1997), relating to the factual situation of a different taxpayer,

which would appear to muddy the waters further.

5 However, the TAM involved herein may arguably be treated

as attaining a status equivalent to a revenue ruling by reason of

reference thereto in Notice 92-33, 1992-2 C.B. 363. See supra p.

9.

The Government relies upon the TAM4 and contends that it is

not bound by the subsequent FCC rulings. In the first place, a

TAM is generally merely a "Letter Ruling" given to a specific

taxpayer based upon facts relating to that taxpayer. It is not a

ruling of general application. In Watts Copy Sys., Inc. v.

Commissioner, T.C. Memo. 1994-124, the Court stated that "We

recognize that technical advice memoranda are not precedent." 

Indeed, section 6110(j)(3) provides "Unless the Secretary

otherwise establishes by regulations, a written determination may

not be used or cited as precedent." Moreover, unlike a revenue

ruling, a TAM is not published in the Cumulative Bulletin. It

certainly stands on an even weaker footing than a revenue

ruling,5 which itself does not have the authority of a Treasury

regulation promulgated pursuant to section 7805.

While it is true that the IRS need not follow decisions of

other agencies, the TAM's heavy reliance on the 1986 Detariffing

Order undermines the "authority" the IRS purports to give the

TAM. Since the TAM relied on the 1986 Detariffing Order holding

that B & C services were mainly a "financial and administrative

service", the FCC's change of position upon more mature
15

reflection in the light of experience that B & C services are

"communication services" should be accorded weighty

consideration, particularly in view of the FCC's expertise in

this field.

The Government also contends that billing and collection

"lacks any true connection to the act of completing long distance

calls and remains a service that many companies, not just

telephone cooperatives, could perform for nonmember telephone

companies." The point is without merit. It erroneously assumes

that billing and collection consists merely of sending out a

bill and depositing a check. Although the Government is correct

that any company could perform such limited services, there are

certain services included within B & C services that only the

cooperative can perform. 

Unlike an outside entity, only local telephone cooperatives

can record the time, duration, and destination of a call. Local

cooperatives also can disconnect service for nonpayment. 

Further, local cooperatives handle customer inquiries about a

range of matters relating to a customer's bill--a function that

cannot be performed by an outside entity. Thus, only the

cooperative can verify the accuracy of the bill first-hand. See

1989 FCC Decision, 4 FCC Rcd at 4005 n.76.

Based on the history of telephone cooperatives, the

treatment of B & C services by the FCC as a "communication

service", and the breadth of B & C services, B & C services
16

should, in our judgment, be included as "communication services"

under section 501(c)(12). Accordingly, the income attributable

to such services should not be included in the 85-percent test. 

As a consequence, more than 85 percent of petitioner's gross

income comes from member sources, and it therefore qualifies as a

tax-exempt entity.

Petitioner's motion for

summary judgment will be granted,

and decision will be entered 

for petitioner. Respondent's 

motion for partial summary judgment

will be denied.