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LMSB Tier I Issue: I.R.C. § 118 Abuse Directive #6

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, DC 20224

LMSB Control No: 4-0209-003
Impacted IRM 4.51.5

February 9, 2009

MEMORANDUM FOR INDUSTRY DIRECTORS
                                       DIRECTOR, FIELD SPECIALISTS
                                       DIRECTOR, PRE-FILING AND TECHNICAL GUIDANCE
                                       DIRECTOR, INTERNATIONAL COMPLIANCE, STRATEGY AND POLICY

FROM:                          Patricia C. Chaback /s/ Patricia C. Chaback
                                       Industry Director
                                       Communications, Technology and Media

SUBJECT: Tier I Issue: I.R.C. § 118 Abuse Directive #6

This Directive is intended to provide field direction on a Tier I Issue relating to Universal Service Fund (“USF”) programs.

Change of Status:

The USF sub-issue within the I.R.C. § 118 Abuse has been moved from active Tier I issue status to monitoring status; however, it remains a Coordinated Issue in accordance with IRM 4.51.2.4 (12-9-2005). The State and Local Tax Incentives, Bio Energy Subsidies, and Environmental Remediation sub-issues under I.R.C. § 118 Abuse remain in the active Tier I status until further notice.

The I.R.C. § 118 USF issue was designated a Tier I issue to emphasize the consistent tax treatment of USF proceeds. The legal position holds that USF proceeds received by telecommunication providers from federal and state universal service programs, represent payments for services constituting taxable income under I.R.C. § 61 and not non-shareholder contributions to capital excludable from income under I.R.C. § 118(a). See Tier I Issue: Section 118 Abuse Directive #2 issued April 2, 2007.

This directive amends the Tier status and procedural requirements outlined in IDD #2 solely with respect to the I.R.C. § 118 USF issue. The I.R.C. § 118 USF issue is no longer in an active Tier I status but will continue to be monitored. It is well-defined, and published guidance in the form of a Coordinated Issue Paper (“CIP”) and Appeals Settlement Guidelines have been issued.

Examination Guidance:

This issue should be examined under the guidance of IRM 4.51.2.4 "LMSB Coordinated Issues". When examining the issue, the UIL code 61.40-01 listed in the CIP should be used.

Issue guidance and support will continue to be provided by the LMSB Technical Advisor for the Telecommunications Industry.

Examiners should utilize the following published guidance to develop the issue:

United States v. Coastal Utilities, Inc., 514 F. 3d 1184 (11th Cir. 2008), aff’g 483 F. Supp. 2d 1232 (S.D. Ga. 2007). The Eleventh Circuit Court of Appeals upheld the lower court’s conclusion that subsidies received by Coastal Utilities Inc. from the federal universal service high cost support program and the Georgia Universal Access Fund did not constitute non-shareholder contributions to capital under I.R.C. § 118(a) but rather constituted income under I.R.C. § 61.
Revenue Ruling 2007-31, 2007-1 C.B. 1275 (05/21/07) Rev. Rul. 2007-31 sets forth the Service’s position that universal service support received by a corporation under the universal service support mechanisms does not constitute a non-shareholder contribution to capital under I.R.C. § 118(a) and is taxable as income under I.R.C. § 61. The support is taxable as income under I.R.C. § 61.
Coordinated Issue Paper on Universal Fund Reimbursements (published 10/24/03) The CIP concludes that the payments received by telecommunication service providers in exchange for providing services as defined under the operative federal and state universal service programs does not constitute a non-shareholder capital contribution under I.R.C. § 118(a) and thus these payments fall within the definition of includible gross income under I.R.C. § 61.
Technical Advice Memorandum 200332025 (released 8/11/03) TAM 200332025 concludes that payments received by the taxpayer from federal and state universal service programs do not constitute a non-shareholder contribution to capital under I.R.C. §118(a) of the Code. They are payments which represent gross income to the Taxpayer per I.R.C. § 61.

Contact:

For questions, contact the LMSB Telecommunications Technical Advisor Barbara Washler at (210) 841-2294.

This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such.

cc: Commissioner, LMSB
       Deputy Commissioner, Operations, LMSB
       Deputy Commissioner, International, LMSB
       Division Counsel, LMSB
       Chief, Appeals
       Directors, Field Operations
     Director, Performance, Quality, Analysis and Support

Page Last Reviewed or Updated: 2013-01-23