SECTION 8. CHARGES IN

CONNECTION WITH LOCAL-ONLY SERVICE

(a) Background . Section 3(b) of Notice 2006–50 defines local-only service as including certain services and facilities provided in connection with local telephone service, even though these services may also be used in connection with long distance service. As examples, the notice cites to Rev. Rul. 72–537, 1972–2 C.B. 574 (telephone amplifier), Rev. Rul. 73–171, 1973–1 C.B. 445 (automatic call distributing equipment), and Rev. Rul. 73–269, 1973–1 C.B. 444 (special telephone).

(b) Subscriber line charges . In addition to the examples in paragraph (a) of this section, amounts paid for subscriber line charges, which are described in Rev. Rul. 87–108, 1987–2 C.B. 260, are also amounts paid for local telephone service. This charge may appear on a bill as “Federal Access Charge,” “Customer or Subscriber Line Charge,” or “Interstate Access Charge.”

(c) Universal service fees —(1) Back- ground . All telecommunications companies that provide interstate and international telecommunications service contribute to the federal Universal Service Fund (USF). Their contributions support four Universal Service programs established and overseen by the Federal Communications Commission (FCC). Some telecommunications companies recover their contribution to the USF directly from their customers by billing them for this charge. The FCC does not require companies to pass on these costs to their customers. Each company makes a business decision about whether and how to recover USF costs. A company that separately states this charge on a bill may call it a “Federal Universal Service Fee” or “Universal Connectivity Fee.”

(2) Application . Because telecommunications providers charge the USF to their customers in connection with their customers’ long distance service, amounts paid for separately stated USF amounts are not amounts paid for local-only service.

January 29, 2007 407 2007–5 I.R.B.

(b) Definitions . The following definitions apply to this section.

(1) Eligible entity means— (i) Any— (A) Business entity (including a corporation or partnership);

(B) Trust or estate; (C) Tax-exempt organization; and (D) Individual owner of rental property and any self-employed individual (including an independent contractor, sole proprietor, or farmer) but only if the individual (including a married couple filing a joint return) reports gross rental and business income totaling more than $25,000 on his or her 2006 federal income tax return;

(ii) That was in operation during any time from March 1, 2003 through July 31, 2006; and (iii) That received and paid for telecommunications service that was reflected on bills dated in April 2006 and September 2006. (2) Total telephone expenses means all amounts paid to every telecommunications provider used by the eligible entity for telephone service that were billed after February 28, 2003, and before August 1, 2006. These amounts include, but are not limited to, amounts paid for long distance service, local-only service, bundled service, 900 number service, universal service fees, federal, state, and local taxes. If an eligible entity is billed for telephone and non-telephone services on one bill each month and does not separately track non-telephone services in its books and records, the entire amount of that bill is included in total telephone expenses. An eligible entity may determine the amount of its total telephone expenses by examining its books and records, including, for example, its general ledger, check register, and canceled checks.

(3) Employee means any person working for the taxpayer full or part time as reported on the eligible entity’s Form 941, Employer’s Quarterly Federal Tax Return, for the 2 ^nd quarter of 2006, other than any person employed as a household employee, in a non-pay status, on a pension, or an active member of the Armed Forces.

(c) Using the EM to determine the amount of the credit or refund —(1) De- termining the federal excise tax as a percentage of the telephone bill —(i) First, determine the amount of federal communications excise tax on all telephone bills

dated in April 2006 and all telephone bills dated in September 2006. The amount is generally separately stated on the bill as “FET” or “federal tax”.

(ii) Next, for all the April telephone bills and all the September telephone bills, divide the amount of federal communications excise tax included on the bills by the total telephone expenses on the bills. The resulting amounts are the April and September percentages, respectively.

(iii) Next, subtract the September percentage from the April percentage. For purposes of this notice, this amount is the federal excise tax percentage (FETP).

(2) Capping the FETP —(i) Determine the number of employees.

(ii) For taxpayers with 250 or fewer employees, the FETP is capped at 2 percent.

(iii) For taxpayers with more than 250 employees, the FETP is capped at 1 percent.

(d) Calculating the amount of the credit or refund —(1) Records kept on a monthly basis . If the entity has maintained its telephone expense records on a monthly basis, multiply the FETP amount by the taxpayer’s monthly total telephone expenses for each month of the 41 month period from March 2003 through July 2006. The product of this calculation is the taxpayer’s credit or refund amount.

(2) Records kept on an annual basis . If the entity has maintained its telephone expense records on an annual basis rather than a monthly basis, prorate its annual amount equally to each month of that year. Thus, for example, a taxpayer maintaining annual telephone expense records for 2003 would divide its total telephone expenses by 12. Next, the taxpayer would use that monthly amount to complete the calculations for the credit or refund amount for 2003. (e) Actual Amounts . Use of the EM is optional. Taxpayers may use the actual amounts paid for federal communications excise tax for nontaxable service to determine the amount of their credit or refund.

(f) Examples . The following examples illustrate the application of this section.

Example 1 —(i) Facts . Business A has 250 employees. A’s April 2006 telephone bill is $1,700, including federal communications excise tax of $47.60. A’s September 2006 telephone bill is $1,600, including federal communications excise tax of $24.00. A’s total telephone expenses, for which it does not have monthly records, are as follows:

2003 — $10,800.00

2004 — $16,000.00 2005 — $20,000.00 2006 — $20,571.37. (ii) Determining the April and September percent- ages . A’s April percentage is 2.8 percent (47.60 ÷ 1,700). A’s September percentage is 1.5 percent (24 ÷ 1,600).

(iii) Determining the FETP . The difference between A’s April percentage and September percentage is 1.3 percent (2.8 - 1.5). Thus, the FETP is 1.3 percent.

(iv) Capping the FETP . Because A’s number of employees does not exceed 250, A’s FETP is not capped at 1 percent.

(v) Prorating . Because A did not maintain its total telephone expense records by month, it prorates those amounts equally to each month within the March 2003 - July 2006 period for each particular year. For 2003, A divides its total telephone expense of $10,800 by 12 and multiplies that result by 10 (the number of months between March and December). ([10,800 ÷ 12] x 10 = 9,000.) For 2006, A divides its total telephone expense of $20,571.37 by 12 and multiplies that result by 7 (the number of months between January and July). ([20,571.37 ÷ 12] x 7 = 12,000.) (vi) Calculating the amount of the credit or re- fund . Using the EM, the amount of A’s credit or refund is calculated as follows:

2003: $9,000 x .013 = $117 (117÷10 = 11.7) Monthly amount $11.70

2004: $16,000 x .013 = $208 (208÷12 = 17.33) Monthly amount $17.33

2005: $20,000 x .013 = $260 (260÷12 = 21.67) Monthly amount $21.67

2006: $12,000 x .013 = $156 (156÷7 = 22.29) Monthly amount $22.29

(vii) Reporting the credit or refund amounts on Form 8913 —(A) Because the credit or refund period does not align with the calendar quarters, Form 8913 requires taxpayers to report the credit or refund amounts in 13 three-month intervals and one two-month interval. Thus, A would report credit or refund amounts on Form 8913 as follows:

March, April, May 2003 - $35.10 (11.70 x 3 = 35.10) June, July, August 2003 - $35.10 (11.70 x 3 = 35.10) September, October, November 2003 - $35.10 (11.70 x 3 = 35.10)

December 2003, January, February 2004 $46.36 (11.70 + [17.33 x 2] = 46.36)

March, April, May 2004 - $51.99 (17.33 x 3 = 51.99) June, July, August 2004 - $51.99 (17.33 x 3 = 51.99) September, October, November 2004 - $51.99 (17.33 x 3 = 51.99)

December 2004, January, February 2005 $60.67 (17.33 + [21.67 x 2] = 60.67)

March, April, May 2005 - $65.01 (21.67 x 3 = 65.01) June, July, August 2005 - $65.01 (21.67 x 3 = 65.01) September, October, November 2005 - $65.01 (21.67 x 3 = 65.01)

December 2005, January, February 2006 $66.25 (21.67 + [22.29 x 2] = 66.25)

2007–5 I.R.B. 408 January 29, 2007

March, April, May 2006 - $66.87 (22.29 x 3 = 66.87) June, July 2006 — $44.58 (22.29 x 2 = 44.58) (B) After determining the amount of credit or refund using the EM, A reports the amounts on Form 8913, and attaches the Form 8913 to A’s 2006 federal income tax return.

Example 2 . The same facts as Example 1 except that A has 500 employees. A’s FETP is capped at 1 percent. Thus, A must make the same calculation as in Example 1 to determine the proper amount of A’s credit or refund of federal communications excise tax using the FETP of 1 percent, rather than 1.3 percent.

SECTION 13. FORM 1040EZ–T, REQUEST FOR REFUND OF FEDERAL TELEPHONE EXCISE TAX

Individuals who do not have to file a federal income tax return and who meet the conditions for requesting a refund of the federal communications excise tax may file Form 1040EZ–T to request the refund. Individuals requesting a refund of actual amounts of federal communications excise tax paid must complete Form 8913 and attach that form to the Form 1040EZ–T.