The Hindu Business Line : It's the court's call

DOES a statute imposing a tax on telephone calls - for which the toll charge "varies in amount with the distance and elapsed transmission time of each individual communication" - cover long-distance telephone charges varying by time but not by distance?

This was the question that the US Court of Appeals for the District of Columbia Circuit decided on December 9, 2005, in the National Railroad Passenger Corporation (Amtrak) case. The district court had concluded that the statute did not cover such charges, and the Court of Appeals agreed.

What is of interest in the case is the taxman's determined pursuit of revenue, despite the court not being in favour of interpreting the law to the Government's advantage, and despite the great strides that telecom has taken over the years.

Toll telephone service defined

Relevant to the case is the definition of `toll telephone service' dating back to 1965, as per Section 4252(b) of the US Internal Revenue Code.

It means a telephonic quality communication for which there is a toll charge that varies in amount with the distance and elapsed transmission time of each individual communication, and the charge is paid within the US.

This is the first limb, 4252 (b)(1), which Amtrak was worried about; Amtrak pleaded non-taxability under this, but the taxman held a different view.

The second limb, Section 4252 (b)(2), speaks of "a service which entitles the subscriber, upon payment of a periodic charge (determined as a flat amount or upon the basis of total elapsed transmission time), to the privilege of an unlimited number of telephonic communications to or from all or a substantial portion of the 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."

However, as a common carrier, Amtrak was exempt from this part of the definition.

Four decades ago, "only AT&T provided long-distance telephone service" and it offered two billing plans, as follows: One, Message Toll Service (MTS), which charged each individual call based on duration, distance travelled, and time of day, and two, Wide Area Telephone Service (WATS), in which customers purchased blocks of usage time for a flat fee.

"WATS customers paid either a flat monthly rate for an unlimited number of calls and minutes, or a lower rate for up to fifteen hours of calling plus a further charge for each additional hour."

The court noted that many customers now pay per-minute charges that remain constant regardless of how far their calls travel.

Amtrak's case was about four services as follows: "two types of domestic `inbound' (also known as `800') service, an inbound service from Canada, and a service allowing various Amtrak locations to contact each other."

For these, Amtrak paid a monthly charge computed by multiplying the number of minutes it consumed by a specific rate for that service.

How to read `and'?

The district court had ruled in favour of Amtrak, by ruling that Section 4252 (b)(1) was inapplicable "because Amtrak's charges did not vary by distance."

So, the Government went on appeal before the Circuit Court.

"We begin, as we must, with the statute's language," reads the 11-page order of Circuit Judge Tatel.

"Subsection (b)(1) imposes a tax only when `there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication'," said the judge. "

Amtrak's charges do not vary by both time and distance, so that would seem to end the matter."

But the Government was urging the court "to find ambiguity in the statute," because Congress sometimes used the word `and' disjunctively, and so the law had to be interpreted "to require only that the charge vary with distance or elapsed transmission time."

Judge Tatel said, "We may not do so." He looked at the history of the statue and observed, "In 1965, when Congress passed section 4252(b), MTS charges varied by both time and distance. Reading `and' conjunctively therefore makes the statute mirror the MTS system, precisely what Congress intended."

Congress meant to tax all long-distance telephone service existing in 1965, and it succeeded, the judge pointed out. "At that time, moreover, Congress had no reason to ensure that the statute covered all future service, as the 1965 Act phased the tax out by the end of that decade."

Messages from ships and movie tickets

The case on hand cites an earlier dispute in which the taxman had sought to tax communication from ships.

There, the argument of the IRS was that "the intent of the statute would be frustrated if a new type of service otherwise within such intent were held to be non-taxable merely because charges for it are determined in a manner which is not within the literal language of the statute."

Judge Tatel said that such reasoning was flawed, in view of the Supreme Court's ruling in a 1926 case, Iselin vs United States. In dispute then was "a provision that taxed the sale of theatre tickets sold at places other than ticket offices", on the basis of the difference between the `established price' at the ticket office and the price for which the ticket was sold.

"Having received and sold a complimentary ticket, the taxpayer argued that because the ticket she sold had no `established price,' the statute imposed no tax on the sale."

The taxman was eager to tax all sales of tickets, on the view that the Government had no intention "to exempt from the tax any sale of tickets or any resale at a profit".

However, the Supreme Court rejected the taxman's argument in the Iselin case because no particular provision referred to the kind of transaction that came under focus.

"What the Government asks is not a construction of a statute, but, in effect, an enlargement of it by the court, so that what was omitted, presumably by inadvertence, may be included within its scope. To supply omissions transcends the judicial function," the apex court had ruled in the Iselin case.

Four score years later...

Thus, the Amtrak case, coming four score years after the 1926 case, was a replay of Iselin.

The Department was making similar arguments, saying that the Congress clearly intended to tax all long-distance telephone charges; and that there was in the section no indication of intention to exempt from the tax any long-distance telephone charges.

Judge Tatel said: "Iselin requires that we give the same reply: `What the Government asks is not a construction of a statute, but, in effect, an enlargement of it by the court, so that what was omitted, presumably by inadvertence, may be included within its scope. To supply omissions transcends the judicial function.'"

Another point that the Government argued was that because the rate for calls from Canada to the US was higher than the rate for domestic calls, Amtrak's charges actually varied by distance.

But the judge saw no merit in the argument.

"These rates differ because calls to and from Canada cross the US/Canadian border, not because Canada is further away," said Judge Tatel.

"For example, as Amtrak points out, calls from Niagara Falls, New York and from Niagara Falls, Canada to the same point in the United States travel the same distance yet incur different charges.

Likewise, calls from Vancouver to Seattle cost more than calls from Miami to Seattle even though the latter travel vastly greater distances."

The court was of the view that the district court's `well reasoned opinion' properly ascertained the statute's meaning, and so affirmed the grant of summary judgment to Amtrak.

"True, this interpretation limits the effectiveness of the tax on long-distance calls, but because section 4252(b)(1) is unambiguous, the IRS must take its case to Congress, not this court," concluded Judge Tatel.

A case of long-distance barking, one may say, up the wrong tree, though.

CaseSensitive@TheHindu.co.in

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