NEW YORK-Citing U.S. Supreme Court precedent begun with publishing industry-related cases dating back to 1926, the Internal Revenue Service has determined a cellular provider must amortize, or spread out over time, tax deductions it takes for reseller commissions on customer acquisitions.
The alternative, preferred by the carrier that requested the agency review, is to take those expenses as “current deductions” all at once for the tax year in which the particular customer acquisitions occurred.
“As you might imagine, the industry has ongoing efforts with respect to this issue,” said Steve Winslow, tax director for Western Wireless Corp., Issaquah, Wash.
The IRS decision was issued as a private letter ruling, which means it doesn’t necessarily set a universal standard for enforcing this aspect of the federal tax code. Private letter rulings are requested and paid for by individual companies, whose identities the agency agrees to withhold.
In the Technical Advice Memorandum detailing Private Letter Ruling 9813001, the IRS described the carrier this way: “Parent is an independent telecommunications company that offers, through its subsidiaries, network and information management, communications, long-distance, cellular mobile and paging services in State A and other states …
“In Year One and Two, parent formed two subsidiaries to own and operate its cellular services … In Year One, parent formed `taxpayer’ to purchase wholesale cellular services and resell [them] to the retail market … In Year Two, parent formed subsidiary to hold and operate a [Federal Communications Commission] license to provide wholesale cellular services in State A …”
The “taxpayer” in this scenario paid third-party distributors one-time commissions for enrolling new customers, plus residual commissions based on future revenues from customers who remained with the `taxpayer’ for more than 180 days, the IRS memorandum said.
In its memorandum, the IRS did not define the period of time over which it believes deductions for customer acquisition-related costs should be amortized.
“If the Service were to be successful in asserting that such costs fall within the definition of customer-based intangibles …, a 15-year amortization would be required. Thus, the taxpayer would have to track each contract and related commission separately and amortize it over 15 years,” Michelle Burke and Tim Kirk, two Washington, D.C.-based accountants, wrote in the July 1998 edition of “The Tax Adviser.”
“The adverse impact is compounded by the fact that … a telecommunications service provider might have to amortize over 15 years commissions paid to a distributor for enrollment of a customer who terminates a contract two months after enrolling.”
Statistical sampling conducted by IRS field staff for this private ruling “indicates an average customer life of approximately 57 months … (and therefore) concludes that renewal of contracts beyond the first year is reasonably certain.”
