NEW YORK-Taxes generally may be one of life’s two certainties, but there is plenty of ambiguity surrounding the application of specific Internal Revenue Service code provisions to the commissions wireless carriers pay their retailers.
Calling for clarity and equity, Thomas Wheeler, president and chief executive officer of the Cellular Telecommunications Industry Association, Washington, D.C., has asked IRS Commissioner Charles Rossotti to issue a revenue ruling that would stop IRS agents from challenging the immediate tax deductions carriers take for wireless telecommunications sales commission expenses.
Wheeler’s letter, sent late last month, asks for expeditious action.
He wrote that CTIA and its members have been encouraging a revenue ruling since October 1994 and have worked with representatives of the IRS and the U.S. Department of the Treasury to research the facts and articulate the wireless industry position.
A spokesman for the IRS’ public affairs office said that revenue rulings affecting an entire industry typically take an extended period of time, as opposed to faster action that can be expected on private letter rulings, which affect just one company.
In his letter to Rossotti, Wheeler said standard industry practice among the nation’s more than 400 wireless carriers is to deduct from their taxable income the commission expenses for renewable subscriber contracts of one year or less as they are paid.
“IRS agents in the past several years have been challenging such deductions and instead requiring commission expenses to be capitalized over the `average time’ a customer remains a subscriber,” Wheeler wrote.
Particularly as the wireless market has opened to widespread competition in recent years, customer churn from one service provider to another has become commonplace, he said. Consequently, ascertaining how long the average subscriber remains a customer is an onerous challenge.
“Under the IRS examiners’ position, cellular telephone companies (and other wireless carriers) would have to spend considerable resources each year attempting to estimate what the `average lives’ of its subscribers are in each market, based on constantly changing data, and `truing up’ data for past years to reflect actual results,” Wheeler’s letter said.
A revenue ruling that would permit carriers to deduct commission expenses as they are incurred “would relieve both taxpayers and the government from the costs associated with litigating this issue on a case-by-case basis, and would ensure that [wireless carriers] are not saddled with the unnecessary and un-administrable burden associated with performing yearly estimates of the `average lives’ of its subscribers for each market.”
Wheeler said the genesis of the problem began with a 1992 U.S. Supreme Court ruling, which held that costs incurred by a target corporation in a friendly acquisition must be capitalized because they produced significant future benefits beyond the year of the corporate takeover.
“Apparently relying on the `future benefits’ test enunciated in Indopco Inc. (v. United States), the IRS examiners have reasoned, in part, that because subscription agreements are renewable at the end of the one-year-or-less initial term, the associated commission expenses should be viewed as the costs of acquiring a long-term asset,” the CTIA letter said.
However, Wheeler noted that the IRS has published rulings stating this case does not “change the fundamental principals of capitalization and deductibility. Traditionally, cellular telephone … and companies in other industries have been able to deduct (as they are paid) commissions and other expenses incurred to build their customer bases.
“Further, based on our research and analysis, we believe that the position of the IRS examiners is wrong as a matter of law because the sales commissions neither create an asset with a life exceeding one year nor yield a significant future benefit.”
