WASHINGTON-The Internal Revenue Service is coming under attack from Congress again. IRS-bashing is common sport. But this time it is not taxpayer abuse that has the lawmakers upset, it is an obscure technical advice memo-or TAM-that could strip away the tax-exempt status from rural telephone cooperatives with separate wireless subsidiaries.
Telephone cooperatives are afforded tax-exempt status as long as their non-member income does not go above 15 percent. In a recent TAM, the IRS said separate subsidiary income not only had to be counted with the parent company’s revenues for tax purposes-instead of being taxed as a separate subsidiary-the revenue represented non-member income. In most cases, this meant the cooperative would lose its tax-exempt status because of the revenues generated from its subsidiary.
Two separate letters, signed by 13 House members and four senators, will be sent next week to IRS Commissioner Charles O. Rossotti urging him to reconsider the decision to apply the TAM to all telephone cooperatives.
“The [TAM] inappropriately threatens the tax-exempt status of many rural telephone cooperatives merely because they legally and legitimately have subsidiaries engaged in telecommunication services … [the TAM] erroneously recharacterizes income that should be considered favorable income for purposes of the 85-percent income testing rule,” said a draft of a letter originally signed by Sens. Byron L. Dorgan (D-N.D.) and Charles E. Grassley (R-Iowa).
The letter is expected to be delivered to Rossotti on May 3, said Aaryn Slafky of the National Telephone Cooperative Association. NCTA has been spearheading the effort to get lawmakers’ signatures.
Other Capitol Hill lobbying
In addition to getting signatures on the IRS letter, NCTA brought executives from rural telephone companies to Washington for three days of lobbying earlier this month. Besides nudging lawmakers to go to bat for them against the IRS, the rural executives also lobbied for congressional intervention on how telecommunications policy is being implemented by the Federal Communications Commission.
This lobbying comes at the same time lawmakers are considering ways to reform the FCC through the re-authorization process. “Rural company considerations should not be an afterthought,” said a briefing paper.
The briefing paper also urged congressional re-direction of the controversial schools and libraries fund. “The controversial nature of the new schools, libraries and health care discounts initiative is undermining the traditional ‘high cost’ mission of universal service. The discounts initiative must be removed from, and funded outside, the jurisdiction of the traditional universal service program,” the paper said.
The FCC
Capitol Hill was not the only place where rural members plead their case. They also met with regulators to urge against rules that will require incumbent local exchange carriers to set up separate subsidiaries to offer advanced services.
Charles Gowder and others from the Valley Telephone Cooperative in Raymondville, Texas, told 10 FCC staffers, “if the FCC moves forward with its separate subsidiary plan for the provision of advanced services by [ILECs], it would have serious ramifications. A company such as Valley Telephone does not have the human resources to create a separate subsidiary and such a subsidiary would have a difficult time obtaining financing.” The FCC discussion was revealed in a letter filed with the FCC describing the meeting.
In a separate gathering of the Rural Telecommunications Group, which contains some overlapping NCTA members, it was learned that small telcos wanting to get into wireless have a difficult time raising the money necessary to participate in the auctions, said RTG’s Caressa Bennet.
That was seconded by Mark Rutherford of Colorado Valley Telephone Cooperative in La Grange, Texas. Colorado Valley operates in the Houston basic trading area. “The Houston BTA has 4 million people. We have been totally out of the game because we couldn’t afford the upfront money … I think it is unfair to our customers because they will never get these services … our customers in the rural areas deserve to have these services,” Rutherford said.
FCC Commissioner Harold Furchtgott-Roth said the FCC should develop auction rules that will facilitate getting services to rural America. “It is paradoxical about how things are done at the [FCC’s Wireless Telecommunications Bureau]. The first consideration has been the urban areas … wireless services in rural America have always been an afterthought,” Furchtgott-Roth said.
Mixed messages
What became apparent from the round of meetings held by NCTA and RTG is that executives of small telephone companies are mixed when answering the question of whether wireless will ever be a competitor to wireline.
Valley Telephone’s Gowder told reporters “wireless because of the infrastructure costs is not there.” He said he bought a Wireless Communications Service license but there is not a technology available to offer affordable service to his customers. “When that technology becomes available” we will be ready, he said.
Contrast that prognosis with what is happening in St. Cloud, Minn.
Cellular Mobile Systems of St. Cloud recently began offering local service with unlimited minutes for $29.95 per month. The service is being marketed differently than most wireless services. It is being sold as a second line for the home. Customers can use the handset anywhere in the St. Cloud area and talk as long as they want but they pay more for extra features like voice mail and caller I.D., features normally free with wireless service.
But with no per-minute charge, customers are signing up. CMS has reached a 17 percent penetration rate with seven carriers in the St. Cloud market, said William O. Casto, CMS general manager.
