  United States Court of Appeals for the Federal Circuit

                                        2007-5077


                       USA CHOICE INTERNET SERVICES, LLC,

                                                      Plaintiff-Appellee,

                                            v.


                                    UNITED STATES,

                                                      Defendant-Appellant.



        H. Christopher Bartolomucci, Hogan & Hartson L.L.P, of Washington, DC, argued
for plaintiff-appellee. Of counsel on the brief was Anthony C. Gulotta, Anderson & Gulotta,
P.C., of Harrisburg, Pennsylvania.

      Teresa E. McLaughlin, Attorney, Tax Division, United States Department of Justice,
of Washington, DC, argued for defendant-appellant. With her on the brief were Eileen J.
O’Connor, Assistant Attorney General; Richard T. Morrison, Deputy Assistant Attorney
General; Gilbert S. Rothenberg and Arthur T. Catterall, Attorneys.

Appealed from: United States Court of Federal Claims

Judge Charles F. Lettow
 United States Court of Appeals for the Federal Circuit


                                      2007-5077


                     USA CHOICE INTERNET SERVICES, LLC,

                                                      Plaintiff-Appellee,
                                           v.

                                  UNITED STATES,

                                                      Defendant-Appellant.


Appeal from the United States Court of Federal Claims in 05-CV-525, Judge Charles F.
Lettow.

                           __________________________

                              DECIDED: April 15, 2008
                           __________________________


Before LINN, DYK, and MOORE, Circuit Judges.

Opinion for the court filed by Circuit Judge LINN.     Opinion concurring in part and
dissenting in part filed by Circuit Judge DYK.

      The government appeals from a final judgment of the United States Court of

Federal Claims following an order granting USA Choice Internet Services, LLC (“USA

Choice”) a refund of communications excise taxes paid from January 1999 through April

2002 on various communication services purchased from local telephone companies.

USA Choice Internet Servs., LLC v. United States, 73 Fed. Cl. 780 (2006). Because we

hold that USA Choice’s incoming-only phone lines meet the definition of “local

telephone service,” 26 U.S.C. § 4252(a), and because none of the lines at issue fall

within the “private communication service” exception, § 4252(d), we reverse.
                                  I. BACKGROUND

      USA Choice is an Internet Service Provider (ISP) that provides “dial-up” Internet

access to residential and business customers in Pennsylvania. See generally Nat’l

Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 974–75 (2005)

(contrasting “dial-up” Internet access with “broadband” service, and noting that “[t]he

traditional means by which consumers in the United States access the network of

interconnected computers that make up the Internet is through ‘dial-up’ connections

provided over local telephone facilities. Using these connections, consumers access

the Internet by making calls with computer modems through the telephone wires owned

by local phone companies” (internal citations omitted)). USA Choice provided network

access servers equipped with modems at several locations throughout Pennsylvania

known as Points of Presence (POPs).

      During the relevant time period, customers would connect to USA Choice’s

servers by using computer modems to dial a local telephone number or “access

number” associated with one of these POPs. One of the network server modems would

answer this incoming call and establish a connection between the computers; this

connection required telephonic quality to successfully facilitate communication. USA

Choice, 73 Fed. Cl. at 783. Subsequent to establishing a telephonic quality connection

between a USA Choice network server modem at the POP and a dial-up customer’s

computer modem, the following communication took place: USA Choice’s server

requested a username and password; the response was compared to USA Choice’s

records; and if the user could be confirmed, USA Choice provided a connection to the

Internet through its network.   Upon several failed authentication attempts, however,




2007-5077                                 2
USA Choice’s modem would instead disconnect the call. Id. Because neither USA

Choice nor the telephone companies blocked incoming calls from subscribers who were

not USA Choice’s customers, anyone could dial one of the ISP access numbers and

connect at least briefly to one of USA Choice’s POPs. If the caller used a regular

telephone instead of a modem, however, he or she might hear a set of electronically-

generated beeps before being disconnected.        Id.   This accessibility allowed USA

Choice’s customers to connect to its servers from any telephone number, provided they

used valid usernames and passwords.

      Dial-up customers connect to the local telephone company, known as a local

exchange carrier (LEC), through a standard analog phone line known as “POTS,” an

acronym for “Plain Old Telephone Service.”       By comparison, USA Choice’s POPs

connected to the LECs via dedicated circuits consisting of a group of digital

communications channels purchased by USA Choice from telephone companies

including ALLTEL, Sprint, Verizon, and Verizon’s predecessor entities GTE and Bell

Atlantic. Id. at 781. The majority of these digital lines were generally known as Primary

Rate Interface (PRI or PRA) circuits.      These lines could carry 23 simultaneous

communications, which could all be associated with a single local telephone number.

Id. at 784. Other services purchased by USA Choice included Digital Channel Services

(DCS) and Basic Rate Interface (BRI or BRA) circuits. Id. at 786–87.

      At issue in this case are excise taxes levied on these lines connecting USA

Choice’s POPs to the local telephone companies. Id. at 782–83. Section 4251(a)(1) of

the Internal Revenue Code imposes a three percent excise tax on “communications

services,” which include “local telephone service.” 26 U.S.C. § 4251(b)(1)(A). Section




2007-5077                                  3
4252(a) defines “local telephone service” as, inter alia, “access to a local telephone

system, and the privilege of telephonic quality communication with substantially all

persons having telephone or radio telephone stations constituting a part of such local

telephone system.” § 4252(a)(1). “Local telephone service” excludes “toll telephone

service” and “private communication service,” which are defined in subsections (b) and

(d) respectively. See § 4252(a).

      USA Choice filed a refund request with the Internal Revenue Service (IRS) on

May 24, 2002. After the IRS disallowed this request, USA Choice filed suit in the Court

of Federal Claims on May 5, 2005. USA Choice argued that the services at issue fall

outside the scope of § 4251(a)(1) because incoming-only lines do not meet the

definition of “local telephone service” in § 4252(a)(1), and, alternatively, because they

meet the “private communication services” exclusion from taxation as defined in

§ 4252(d).   It also presented argument pertaining to excise taxes on long distance

service not relevant to this appeal. The Court of Federal Claims held a trial in July 2006

and also considered post-trial briefing and argument. The Court of Federal Claims

ultimately issued an opinion granting USA Choice the majority of the refund it desired,

holding that USA Choice’s incoming-only lines were not “local telephone service” under

§ 4252(a)(1) and that nearly all of the remaining contested lines met the “private

communication service” exception of § 4252(d). USA Choice, 73 Fed. Cl. at 802. The

government timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).




2007-5077                                   4
                                    II. DISCUSSION

                                 A. Standard of Review

         “In reviewing a final decision of the Court of Federal Claims after a trial, we

review legal conclusions de novo, and we review factual findings under the clearly

erroneous standard. A finding is ‘clearly erroneous’ when although there is evidence to

support it, the reviewing court on the entire evidence is left with the definite and firm

conviction that a mistake has been committed.” Am. Pelagic Fishing Co. v. United

States, 379 F.3d 1363, 1371 (Fed. Cir. 2004) (internal citations and quotation marks

omitted).    “Statutory interpretation is a question of law that we review de novo.”

Wesleyan Co. v. Harvey, 454 F.3d 1375, 1378 (Fed. Cir. 2006). Additionally, “[t]he

proper application of the tax laws to an undisputed set of operative facts is a question of

law, over which we exercise plenary review.” Lockheed Martin Corp. v. United States,

210 F.3d 1366, 1370 (Fed. Cir. 2000).

                                        B. Analysis

                               1. Local Telephone Service

         The Court of Federal Claims held that those lines that were incoming-only—i.e.,

lines that did not permit outbound calls—did not meet the definition of local telephone

service and thus were taxed improperly. USA Choice, 73 Fed. Cl. at 795. Not all of

USA Choice’s lines were found to be truly incoming-only, however, and these other

lines were analyzed under the “private communication service” provision, discussed

infra.

         On appeal, the government argues that the statutory text does not preclude

treatment of incoming-only lines as local telephone service and that the self-imposed




2007-5077                                   5
restrictions placed by USA Choice on communications over these lines were irrelevant

to its “privilege” to use the underlying service, which is subject to the excise tax. The

government also urges us to defer to various IRS Revenue Rulings under Chevron

U.S.A., Inc. v. Natural Resource Defense Council, Inc., 467 U.S. 837 (1984). USA

Choice argues that the Revenue Rulings do not bind us and responds to the

government by asserting that its incoming-only lines could not provide it with “access to

a local telephone system,” nor the privilege of “communication with” substantially all

other subscribers, because it could not affirmatively initiate calls. It further contends

that because it disconnected calls from subscribers without modems and from persons

who are not customers, it did not communicate with “substantially all” subscribers in the

local system.

                            a. Access to a Local Telephone System

       The statute provides:

       (a) Local telephone service.—For purposes of this subchapter, the term
       “local telephone service” means—
                (1) the access to a local telephone system, and the privilege of
                telephonic quality communication with substantially all persons
                having telephone or radio telephone stations constituting a part of
                such local telephone system, and
                (2) any facility or service provided in connection with a service
                described in paragraph (1).
       The term “local telephone service” does not include any service which is a
       “toll telephone service” or a “private communication service” as defined in
       subsections (b) and (d).

26 U.S.C. § 4252(a). “In construing a statute, we begin with its literal text, giving it its

plain meaning.” Hawkins v. United States, 469 F.3d 993, 1000 (Fed. Cir. 2006). We

begin with the requirement that local telephone service provide “access to a local

telephone system.” § 4252(a)(1). The Court of Federal Claims found this “access”




2007-5077                                    6
prong unhelpful and thus did not rely on it. USA Choice, 73 Fed. Cl. at 791–92. It found

that dictionary definitions of “access” could be read in multiple ways and that our prior

decision in Trans-Lux Corp. v. United States, 696 F.2d 963 (Fed. Cir. 1982) (interpreting

“access” in the context of teletypewriter exchange service, which is also subject to the

communications excise tax and is defined in section 4252(c)), did not address the

“directionality of messages.” USA Choice, 73 Fed. Cl. at 791.

       On appeal, USA Choice argues that this prong presents an alternative ground for

affirmance. It argues, as it did to the Court of Federal Claims, that “access” connotes

the right to enter, and that because USA Choice can only passively receive incoming

calls, it cannot “affirmatively enter” the local telephone system. USA Choice also relies

on our observation in Trans-Lux that a particular device providing access to the Telex

network allowed subscribers to “direct-dial any other network subscriber.” 696 F.2d at

964.   The government responds that another common definition of “access” is “the

ability to obtain or make use of.” It also asserts that Trans-Lux stands for the opposite

proposition by citing the following discussion of the technological meaning of the word

access in that opinion: “From the weight of the credible evidence, the trial judge

determined that the word access was recognized in the communications field in general,

and with respect to the Telex network in particular, as meaning the interface or

connection between the Telex network’s transmission lines (and the central exchange)

and the [customer terminal].” Id. at 965 (emphases added).

       We agree that general dictionary definitions of “access” provide little insight.

Definitions contemporaneous with the introduction of this statutory language include

restrictive language implying a right to enter as well as broad language merely requiring




2007-5077                                  7
the ability to make use of something. Webster’s Third New International Dictionary 11

(1961) (defining “access” as, inter alia, “permission, liberty, or ability to enter, approach,

communicate with, or pass to and from,” “freedom or ability to obtain or make use of,”

and “a way by which a thing or place may be approached or reached”). Our decision in

Trans-Lux, however, which involved a very similar and related subsection of the same

statute, informs that the “technological meaning of the word access . . . in the

communications field in general . . . mean[s] the interface or connection between . . . the

central exchange and the [customer terminal].”          696 F.2d at 965.       Because this

provision is so closely related to the definition at issue, and because the language of

this prong is so similar, compare § 4252(a)(1) (“the access to a local telephone

system”), with § 4252(c) (“the access from a teletypewriter or other data station to the

teletypewriter exchange system”), we find this interpretation of “access” persuasive in

concluding that “access” simply means connectivity. See Finnegan v. Leu, 456 U.S.

431, 438 n.9 (1982) (“Certainly one would expect that if Congress had intended identical

language to have substantially different meanings in different sections of the same

enactment it would have manifested its intention in some concrete fashion.”).             We

recognize that the Trans-Lux opinion ultimately addressed a different legal issue, but

this broad recognition of general industry understanding likely indicates that the

“directionality of messages” bears no relation to the term “access” in the statute. We

turn then to the second prong of the statutory definition of local telephone service.

                  b. The Privilege of Telephonic Quality Communication

       The Court of Federal Claims held that USA Choice did not enjoy “the privilege of

telephonic quality communication with substantially all persons having . . . telephone




2007-5077                                     8
stations constituting a part of such local telephone system,” § 4252(a)(1) (emphasis

added), on its incoming-only lines because it could not choose to initiate

communications with whomever it chose to call, USA Choice, 73. Fed. Cl. at 795, and

because “with” does not encompass “single-direction communications,” id. at 792. 1 The

government devotes the majority of its appeal to arguing that this language is consistent

with incoming-only service and that the Court of Federal Claims erred by holding

otherwise.

      USA Choice argues that Congress must have intended “with” to require the

ability to communicate “to and from” other telephone subscribers based on the

contrasting statutory language used in an adjacent subsection.          Specifically, the

definition of “toll telephone service,” requires “the privilege of an unlimited number of

telephonic communications to or from all or a substantial portion of the persons having

. . . telephone stations in a specified area which is outside the local telephone system

area.” § 4252(b)(2) (emphasis added). USA Choice contends that without the ability to

initiate calls, it did not enjoy the “privilege of communicating with” other local

subscribers, and that construing this language to encompass incoming-only lines would

impermissibly import the allegedly broader language of subsection (b)(2). See O’Neill v.

Dep’t of Hous. & Urban Dev., 220 F.3d 1354, 1361 (Fed. Cir. 2000) (“In light of

Congress’ choice of different language in subsections of the same statute, it would be

inappropriate to construe the narrower language that Congress chose for the prohibition

as if it were equivalent to the broader language that Congress chose for the



      1
             The Court of Federal Claims also held that USA Choice’s use of computer
modems and password authentication limited its ability to communicate with other
subscribers, USA Choice, 73 Fed. Cl. at 793–95, which we discuss infra.


2007-5077                                  9
exemptions.”). It further argues that Congress must have intended to impose these

directional restrictions in the statute because subsection (b)(2) was amended

specifically to include Wide Area Telephone Service (WATS), which at the time could

only be used to make outbound calls.

      The Court of Federal Claims agreed with USA Choice and held that while “[t]he

words ‘to or from’ capture single-direction communications . . . the word ‘with’ connotes

reciprocity.” USA Choice, 73 Fed. Cl. at 792 (citing Webster’s Seventh New Collegiate

Dictionary 1026 (1970) (indicating that “with” is “used as a functional word to indicate

one to whom a usu[ally] reciprocal communication is made” (alteration in original))).

Even if we accept this conclusion, however, it does little to resolve the underlying

dispute.   After all, most telephone calls, including communications negotiated by

computer modems, involve reciprocal communication once a connection has been

established. For example, “I spoke with Jane on the phone” does not indicate who

initiated the conversation. As another Court of Federal Claims decision dealing with

nearly identical facts correctly observed, interpreting this statute “requires [us] to

recognize that ‘inward dialing’ and ‘one-way communication’ are not synonymous

phrases; that . . . once a call was initiated, two-way communication occurred over lines

that supported telephonic quality communication.” Comcation, Inc. v. United States, 78

Fed. Cl. 61, 72 (2007).      While the “access” prong of the statute is focused on

connectivity, the “communication with” prong refers to what happens after that

connection is established.   The issue therefore is whether two-way communication

existed on USA Choice’s incoming-only lines after a call was initiated. Here, even the

authentication process demonstrates that two-way communication occurred during




2007-5077                                  10
connections to USA Choice’s network servers because a server communicated

requests for usernames and passwords, which were communicated back to the server

by the subscribers who dialed the access number.

       Nor does Congress’ use of different prepositions in subsection (b)(2) compel the

narrow reading of subsection (a)(1) advanced by USA Choice. A more natural reading

of the statute indicates that this distinction likely relates to grammatical—rather than

substantive—context. Subsection (a)(1) refers to “communication [singular] with” in the

abstract, while subsection (b)(2) is framed in terms of “an unlimited number of . . .

[individual] communications [plural] to or from.”       Even accepting USA Choice’s

argument, however, would not compel a different result.        Because the privilege of

“communication with” another party requires only the possibility of two-way

communication after a call is initiated, as discussed above, the distinction USA Choice

reads into the use of “communication with” instead of “communications to or from” is

irrelevant to the outcome of this case.

       A review of the legislative history behind this language further supports our

conclusion that Congress did not intend for local telephone service to turn on the ability

to make outbound calls. Congress first levied excise taxes on telephone services as

part of the Spanish War Act of 1898, and since that time has updated, modified,

repealed, and extended the communications excise tax numerous times. See generally

OfficeMax, Inc. v. United States, 428 F.3d 583, 585–86 (6th Cir. 2005). The language

at issue in this case originates in Congress’ 1965 amendment to sections 4251 and

4252 as part of the Excise Tax Reduction Act of 1965, Pub. L. No. 89-44, § 302, 79

Stat. 136, 145–46 (1965), which created the “local telephone service” category as a




2007-5077                                  11
successor to the “general telephone service” category defined in 1958 as part of the

Excise Tax Technical Changes Act of 1958, Pub. L. No. 85-859, § 133, 72 Stat. 1275,

1289–90 (1958). See S. Rep. No. 89-324 (1965), as reprinted in 1965 U.S.C.C.A.N.

1690, 1725 (“The definition[] of local telephone service (previously general telephone

service) . . . ha[s] been updated and modified to make it clear that it is the service as

such which is being taxed and not merely the equipment being supplied.”); H.R. Rep.

89-433 (1965), as reprinted in 1965 U.S.C.C.A.N. 1645, 1676 (same). As we observed

in Trans-Lux, one of the primary motivations for this amendment was the creation of the

“private communication services” exemption. See 696 F.2d at 967. Another motivation

was the aforementioned desire to shift the focus of the tax to the services rather than

the equipment being provided. Additionally, as observed in Comcation, the definition of

general telephone service was redesignated “local telephone service,” and the definition

of “toll telephone service” was updated to clarify that WATS was included in toll

telephone service and excluded from local telephone service. 78 Fed. Cl. at 71–72 (and

cites therein).   USA Choice argues that this change indicates a desire to exclude

services that could be initiated only by one party from the “local telephone service”

category.

       First, there is no indication that the pre-1965 definition of “general telephone

service” was in any way related to the ability to make outgoing calls. Prior to 1965,

section 4252 defined “general telephone service” as

       any . . . telephone service furnished in connection with any . . . telephone
       station which may be connected (directly or indirectly) to an exchange
       operated by a person engaged in the business of furnishing
       communication service, if by means of such connection communication
       may be established with any other . . . telephone station.




2007-5077                                  12
26 U.S.C. § 4252(a) (1964). The legislative history surrounding the creation of this

previous language indicates that the ability to originate calls was not essential. See S.

Rep. No. 85-2090 (1958), as reprinted in 1958 U.S.C.C.A.N. 4395, 4440 (“If the existing

facilities may be so connected [as described in section 4252(a)], it is immaterial that the

practice of the subscriber is not to make such connections, or that the person engaged

in the business of furnishing communication service denies permission to the subscriber

to make such connections.”). Because the definition of local telephone service was

designed to track the earlier definition of “general telephone service” with the exceptions

noted, and because the services purchased by USA Choice are neither WATS nor

private communication services as discussed infra, we see no reason to infer that

Congress meant to impose other new limitations on local telephone service related to

call initiation.

        Second, although USA Choice argues that the amendment of the toll telephone

service definition to include WATS indicates an intent to remove any incoming-only or

outgoing-only lines from the definition of local telephone service, we find no support for

this argument. The House and Senate Reports clarify that WATS is included in toll

telephone service, but their description of this service notably excludes any mention of

restrictions on incoming or outgoing calls. See S. Rep. No. 89-324 (1965), as reprinted

in 1965 U.S.C.C.A.N. 1690, 1725 (“This is a long-distance service whereby, for a flat

charge, the subscriber is entitled to make unlimited calls within a defined area

(sometimes limited as to the maximum number of hours).”); H.R. Rep. 89-433 (1965),

as reprinted in 1965 U.S.C.C.A.N. 1645, 1677 (same). These reports also discuss local

telephone service without even mentioning the allegedly critical “communication with




2007-5077                                   13
substantially all persons” language. See S. Rep. No. 89-324 (1965), as reprinted in

1965 U.S.C.C.A.N. 1690, 1725 (“[I]n the case of local telephone service, the definition

makes it clear that it is the right of access to a local telephone system and the privilege

of telephonic quality communication which is taxed together with facilities or services

provided with this service.”); H.R. Rep. 89-433 (1965), as reprinted in 1965

U.S.C.C.A.N. 1645, 1676–77 (same). Moreover, the inclusion of “with” in the 1965

amendments cannot be accorded any significance as it relates to the prior statutory text

because the replaced text similarly recited “communication may be established with any

other . . . telephone station.” 26 U.S.C. § 4252 (1964) (emphasis added). Accordingly,

the more logical reading of the statutes and legislative histories indicates that the

purpose of the 1965 amendments with respect to WATS related to the flat-rate long

distance characteristics of the service rather than to any limitations related to

directionality.

       As previously mentioned, the Court of Federal Claims also held that USA Choice

did not enjoy the privilege of communication with “substantially all persons having . . .

telephone stations,” because its POP servers could only “communicate” with

subscribers who used a modem. USA Choice, 73 Fed. Cl. at 793–94. The Court of

Federal Claims further held that even if substantially all of the relevant subscribers used

modems to call USA Choice, there would be no “communication” with non-customers

before they were disconnected by USA Choice’s servers because “[t]he transmission of

the identification request is so limited that it cannot be considered to be a ‘telephonic

quality communication’ in the ordinary sense of those words.” Id. at 794–95. USA

Choice presents several arguments defending these determinations, while the




2007-5077                                   14
government responds that USA Choice’s position improperly focuses on actual use

instead of the “privilege” of use specified in the statute.

       USA Choice’s arguments ignore evidence that these use restrictions relate solely

to USA Choice’s own self-imposed limitations. USA Choice’s decision to connect these

lines to modems in its network servers rather than to telephones through equipment

“such as a multiplexor or PBX,” see id. at 794 n.24, “though perfectly understandable for

a commercial ISP—resulted in self-imposed limits that did not fundamentally alter the

nature of the services that [USA Choice] had the ‘privilege’ to use,” Comcation, 78 Fed.

Cl. at 65. USA Choice’s configuration decision no more limited the underlying service’s

capabilities than would a subscriber’s choice to connect a facsimile machine rather than

a telephone set to his or her telephone line. 2 Furthermore, as the Court of Federal

Claims found in this case, a successful connection between one of USA Choice’s server

modems and another subscriber’s modem required telephonic quality. USA Choice, 73

Fed. Cl. at 783.     This telephonic quality connection was established even where

authentication ultimately failed and USA Choice consequently disconnected the call. Id.

at 795 n.26. As with its choice to utilize modems, USA Choice cannot alter the inherent




       2
               The Court of Federal Claims observed that if USA Choice wished to use
its lines for voice communications, its “channel or circuit would also have to be
configured by the provider to allow use of” voice-capable equipment. USA Choice, 73
Fed. Cl. at 794 & n.24. However, in this case, uncontradicted testimony offered by the
government indicates that such provision of equipment by USA Choice would be the
only configuration necessary. See id. This conclusion is further supported by the Court
of Federal Claims’ finding that in order for USA Choice’s modems to function,
“[t]elephonic quality”—i.e., “a communication channel over which it [i]s possible to have
a two-way conversation with the use of telephones”—“is required.” Id. at 783 & n.7
(alterations in original).
        Regardless, USA Choice bore the burden to show that its lines were not
appropriately configured.


2007-5077                                     15
capabilities of the communication services it purchased merely by establishing a system

for disconnecting calls with subscribers other than its customers.

       It is undisputed that “privilege” implicates either a “right” or “legal freedom” rather

than actual use. See id. at 792; see also Comcation, 78 Fed. Cl. at 65 (“Nothing about

the word ‘privilege’ connotes that the service purchased must actually be used by the

taxpayer in the fashion covered by the excise tax.”). The Court of Federal Claims noted

that “USA Choice agrees ‘that it is a line’s actual capabilities, not its use, that govern . . .

taxability.” USA Choice, 73 Fed. Cl. at 795 (quoting USA Choice’s post-trial reply brief)

(alteration in original); see also Comdata Network, Inc. v. United States, 21 Cl. Ct. 128,

131 (1990) (holding that the toll telephone tax applied because the plaintiff had “the right

to utilize the telephone lines to communicate [in accordance with § 4252(b)(2)]. That the

service may not, in fact, be so used by plaintiff is irrelevant to the existence of the

privilege”); accord Rev. Rul. 79-245, 1979-2 C.B. 380 (“Where a telephone service

provides the subscriber the privilege of telephonic quality communication with

substantially all other subscribers to the local telephone system, it is immaterial whether

the subscriber exercises the privilege.”).       This focus on the nature of the service

comports with the legislative history of the Excise Tax Reduction Act of 1965, which

indicates that “[t]he definition[] of local telephone service . . . ha[s] been updated and

modified to make it clear that it is the service as such which is being taxed and not

merely the equipment being supplied.” S. Rep. 89-324 (1965), as reprinted in 1965

U.S.C.C.A.N. 1690, 1725. Here, it is undisputed that anyone could call USA Choice’s

access numbers and at least briefly connect, and that it was USA Choice’s decision to




2007-5077                                     16
implement modems and to enforce user logins to trigger disconnects that precluded

further reciprocal communication.

       For the foregoing reasons, we hold that neither the inability to place outgoing

calls, nor the choice to communicate using computer modems, nor the password

authentication scheme employed by USA Choice excludes the communication services

it purchased from the definition of “local telephone service” subject to the

communications excise tax of section 4251(a)(1).

       We note that our holding does not conflict with revenue rulings in which the IRS

has held incoming-only lines subject to the communications excise tax. See, e.g., Rev.

Rul. 77-196, 1977-1 C.B. 343 (“In defining taxable local telephone service, section

4252(a)(1) makes no distinction between systems that provide access to a local

telephone network only by receiving calls and systems that both receive and originate

calls. . . . Accordingly, the fact that . . . [the system at issue] can only receive incoming

calls from a local telephone system is not material to the tax determination.” (citing Rev.

Rul. 75-102, 1975-1 C.B. 351)). Thus, we need not address the extent of deference—if

any—properly accorded to these rulings. See generally W. Co. of N. Am. v. United

States, 323 F.3d 1024, 1032 (Fed. Cir. 2003) (noting that “revenue rulings merely

represent the position of the United States and do not bind this court,” but that we “may

refer to . . . revenue rulings for guidance and accept that reasoning in whole or in part to

assist [our] understanding of the language of the revenue code”).

       Nor do our interpretations of the “access” and “communication with” prongs

render either prong of section 4252(a)(1) superfluous or redundant. See, e.g., Walters

v. Metro. Educ. Enters., Inc., 519 U.S. 202, 209 (1997) (“Statutes must be interpreted, if




2007-5077                                    17
possible, to give each word some operative effect.”).         The words “access” and

“communication” must be viewed within the context of the statute. See, e.g., Davis v.

Mich. Dep’t of the Treasury, 489 U.S. 803, 809 (1989) (“It is a fundamental canon of

statutory construction that the words of a statute must be read in their context and with

a view to their place in the overall statutory scheme.”).     The second prong is not

rendered superfluous because the “communication” prong requires “telephonic quality,”

whereas the “access” prong only requires connectivity. Nor is the connectivity connoted

by “access” encompassed within the “communication” requirement of the second prong.

The statute requires “access to a local telephone system” and “telephonic quality

communication with substantially all persons having . . . telephone stations constituting

a part of such local telephone system.” § 4252(a)(1) (emphases added). We need look

no further than the next subsection of the statute to find an example of services

providing “communication with” subscribers to a local telephone system but not “access”

to that local system.   Section 4252(b) explicitly provides that toll telephone service

“entitles the subscriber . . . to the privilege of an unlimited number of telephonic

communications to or from all or a substantial portion of the persons having . . .

telephone stations in a specified area which is outside the local telephone system area

in which the station provided with this service is located.” § 4252(b)(2). Thus, toll

telephone service provides “communication with” members of a local telephone system

despite not having direct access to that local system. As another example, in the recent

Vonage case, we described how “[s]ince 2002 Vonage has provided telephone service

to its subscribers through Voice over IP (‘VoIP’) technology. . . . Vonage’s system uses

the internet to transmit telephone signals, rather than using the traditional public




2007-5077                                  18
switched telephone network (‘PSTN’). When Vonage subscribers place calls to non-

subscribers on the PSTN, Vonage’s system transmits the signals through the internet,

and then relays them to the PSTN.” Verizon Servs. Corp. v. Vonage Holdings Corp.,

503 F.3d 1295, 1298 (Fed. Cir. 2007).

       Although toll telephone services and VoIP technology can be said to indirectly

access at least the local telephone network of the recipient, arguments that this qualifies

as “access” under section 4252(a)(1) have been consistently rejected by other courts.

For example, in OfficeMax, “the government argue[d] that OfficeMax’s plan must be a

service provided in connection with a local telephone service because all long-distance

services eventually require access to local telephone systems.” 428 F.3d at 599–600.

The court rejected this argument and held that “the definition of local-telephone service

requires ‘access to a’ local telephone system, not ‘access to every’ local telephone

system included within the boundaries of a long-distance plan.” Id. at 600; accord

Reese Bros., Inc. v. United States, 447 F.3d 229, 241 (3d Cir. 2006); Am. Bankers Ins.

Group v. United States, 408 F.3d 1328, 1338 (11th Cir. 2005); Am. Online, Inc. v.

United States, 64 Fed. Cl. 571, 582–83 (2005). Thus, in at least some circumstances,

one can have “the privilege of telephonic quality communication with” persons in various

local telephone systems without having “access” to those systems under the statute.

Accordingly, this prong of the definition retains independent meaning under our

interpretation of “access.”

       Finally, we are mindful of the principle that “if doubt exists as to the construction

of a taxing statute, the doubt should be resolved in favor of the taxpayer.” Xerox Corp.

v. United States, 41 F.3d 647, 658 (Fed. Cir. 1994) (quoting Hassett v. Welch, 303 U.S.




2007-5077                                   19
303, 314 (1938)). However, this is not such a case. “Here doubts which may arise

upon a cursory examination of [the statutory provisions at issue] disappear when they

are read, as they must be, with every other material part of the statute, and in the light

of their legislative history.” White v. United States, 305 U.S. 281, 292 (1938) (internal

citation omitted); see also Irwin v. Gavit, 268 U.S. 161, 168 (1925) (noting that although

“the tax laws should be construed favorably for the taxpayers . . . that is not a reason for

creating a doubt or for exaggerating one”).

                               2. Private Communication Service

       Having concluded that USA Choice’s lines provided “local telephone service,” we

must now turn to the Court of Federal Claims’ decision that even the “local telephone

service” lines were nonetheless exempt from the communications excise tax of

§ 4251(a)(1) because they met the requirements of a “private communication service.”

USA Choice, 73 Fed. Cl. at 798. Section 4252(d)(1) defines “private communication

service” as:

       (1) the communication service furnished to a subscriber which entitles the
       subscriber—
              (A) to exclusive or priority use of any communication channel or
              groups of channels,
                                               ***
       regardless of whether such channel, groups of channels, or
       intercommunication system may be connected through switching with a
       service described in subsection (a) [local telephone service], (b), or (c).

The statute also requires that “a separate charge is made for such service.” § 4252(d). 3




       3
             The Court of Federal Claims held that USA Choice’s non-incoming-only
services met the statutory exception for private communication services with the
exception of specific Verizon and Sprint services, which failed the “separate charge”
requirement. USA Choice has not appealed the Court of Federal Claims’ determination
regarding these services. An affirmance of this ruling would require a remand for a


2007-5077                                     20
       The Court of Federal Claims’ analysis and the parties’ arguments on appeal

focus on the statutory requirement that a private communication service must “entitle

[USA Choice] to exclusive or priority use of any communication channel or groups of

channels.”   § 4252(d)(1)(A).   The parties debate the similarity between the “private

communication service” defined in the statute and industry definitions related to “private

lines.” USA Choice also argues that the statutory language clearly contemplates private

communication systems connected to a local telephone exchange, that it did not have to

share its lines to the local exchange—i.e., those lines only allowed calls to or from USA

Choice’s POPs, and that the legislative history indicates Congressional intent

supporting a broad interpretation of this provision.        The government’s principal

argument is that while an exempted private communication service may be connected

with an LEC, the exemption does not extend to the very lines making that connection.

Additionally, the government again contends that we should defer to IRS Revenue

Rulings and makes various arguments based on the legislative history and a prior

private communication service exemption.         We conclude that the Court of Federal

Claims erred in applying the private communication service exemption to the lines at

issue in this case.

                                            a.

       The most significant shortcoming in the Court of Federal Claims’ analysis is that

it failed to recognize that USA Choice’s lines did not serve to provide a distinct

“communication service . . . regardless of whether [that service] may be connected

through switching with a [local telephone service].” § 4252(d)(1) (emphasis added).


determination of whether the various incoming-only services met this requirement as
well. Because we reverse, however, no such inquiry is necessary.


2007-5077                                  21
This statutory language requires that the system at issue provide a “communication

service” beyond that of mere local telephone service, not just connectivity to the local

telephone system itself.    Dedicated lines that, alone or in combination with other

privately owned or publicly shared equipment, do no more than furnish a subscriber with

the ability to obtain local telephone service do not constitute the statutorily defined

“private communication service” entitled to the exemption of § 4252(d)(1).             As

contrasted with typical private lines, PBX systems, Centrex systems, and answering

service switchboard systems in existence at the time this statutory provision was

enacted, all of which could be characterized as having communication channels that

facilitated communications services beyond mere local telephone service, the lines at

issue in this case served only to provide connectivity to the LEC and not to facilitate or

provide any “communication service” that can be fairly characterized as “private.”

      The legislative history further supports our conclusion. The recommendations

from the President accompanying the proposed legislation leading to the enactment of

the language at issue stated that

      the tax on local and long-distance telephone service . . . will no longer
      apply to amounts paid for private communications systems even where
      the private system is linked with the general telephone network. This
      service is almost exclusively a business cost item and competes with
      nontaxable business communication services. Charges for service on the
      general telephone network originating or terminating in the private system
      would be taxable . . . .

Recommendations Relative to Excise and Fuel Taxes, H.R. Doc. No. 173, at 5 (1965)

(emphasis added).      Nothing in the subsequent legislative history indicates any

disagreement by Congress with this recommendation, and the relevant language

proposed in this document was substantively identical to the text as enacted. See id. at




2007-5077                                  22
16 (defining “private communication service” as, inter alia, “the communication service

furnished to a subscriber . . . which entitles the subscriber to exclusive or priority use of

any communication channel or groups of channels (regardless of whether such channel

or groups of channels may be connected through switching with a [local telephone

service] for which a separate charge is paid)”).

       More generally, “Congress enacted the private communication services

exemption in order to correct the imbalance that had developed between telephone

company-furnished services and subscriber-owned equipment,” and in response to

“telephone companies . . . losing business to companies that provided . . . equipment

that could be purchased and operated by the users themselves.” Trans-Lux, 696 F.2d

at 967.     This equipment comprised either “exclusive or priority use of any

communication      channel    or   groups     of   channels,”    § 4252(d)(1)(A),    or   an

“intercommunication system,” § 4252(d)(1)(B), but clearly excluded any connection to

the LEC for the provision of local telephone service.        Connection to the LEC was

provided exclusively by the local telephone company in 1965. The local telephone

company faced no competitive disadvantage as to connectivity with subscribers, and

there was no competitive imbalance in that regard that cried out for legislative

correction. Thus, while Congress clearly intended to remove “a severe handicap to the

expanded use of . . . new and varied services,” S. Rep. No. 89-324 (1965), as reprinted

in 1965 U.S.C.C.A.N. 1690, 1726, it chose to do so only by removing “the tax on private

communication systems,” id., not by exempting any new or varied telecommunication

service that might be connected to the local telephone system—by dedicated lines or

otherwise—from taxation.        Accordingly, such services may qualify as “private




2007-5077                                    23
communication services” only if they meet the explicit definition provided in the statute.

See, e.g., Luben Indus., Inc. v. United States, 707 F.2d 1037, 1041 (9th Cir. 1983) (“The

general rule for construing tax statutes is that any doubt in the application of the statute

is to be resolved in favor of the taxpayer. However, where the taxpayer attempts to

bring itself within a tax exemption, as Luben is attempting to do in this case [involving

contested federal excise taxes], doubt is to be resolved in favor of the Government.”).

                                             b.

       USA Choice contended before the Court of Federal Claims and argues again on

appeal that notwithstanding the fact that its lines served only to provide connections to

the local telephone system, the “‘specially configured’ high-speed digital circuits” it

chose to purchase necessarily provided the “exclusive or priority use” required by

§ 4252(d)(1)(A). Appellee Br. 56–57 (arguing that “USA Choice purchased dedicated

line capacity for its sole use . . . [and that] no other telephone subscriber could use USA

Choice’s dedicated lines to establish a circuit terminating somewhere else” (emphasis

omitted)).   The Court of Federal Claims agreed, noting that “[t]hese were not lines

where multiple telephone subscribers would share the same loop on an equal basis.

USA Choice was not required to yield to anyone in its use of these communication

channels.” USA Choice, 73 Fed. Cl. at 800 (internal citation omitted). We disagree.

While these statements may accurately describe aspects of USA Choice’s dedicated

multi-channel connections to the LEC, the fact remains that anyone else on the PSTN

was free to dial USA Choice’s access numbers and necessarily made use of USA

Choice’s dedicated lines to connect with its POPs. “USA Choice concedes . . . that

anyone, whether in the local calling area or not, can ‘call’ the [access numbers] and




2007-5077                                   24
USA Choice’s modem bank will ‘answer’ the call.” Pl.’s Post-Trial Br. 21 (emphasis

added). The fact that USA Choice did not have to share its digital connections to the

LEC with other local subscribers did not entitle USA Choice to exclusivity or priority over

the competing use of its communication channels by anyone dialing USA Choice’s

access numbers, even if USA Choice’s lines were deemed a separate “communication

service” under the statute—a conclusion with which we disagree.

       USA Choice’s lines fail not only the statutory requirement of “exclusive or priority

use,” but also the statute’s definition of private communication service as “the

communication service furnished to a subscriber which entitles the subscriber . . . to

exclusive or priority use.”   § 4252(d)(1) (emphases added).       The Court of Federal

Claims held that because the dial-up customers used USA Choice’s lines only “by dint

of their relationship with USA Choice,” the statutory requirement was met. USA Choice,

73 Fed. Cl. at 801. We disagree. Under the reasoning of the Court of Federal Claims,

any business telephone line could be considered a private communication service if the

subscriber chooses to use it exclusively to communicate with its customers. Closer

questions may involve the use of lines connecting multiple offices or locations of a

single subscriber through an LEC, see generally Comcation, 78 Fed. Cl. at 75, but we

are not faced with that situation today. Here we consider lines that USA Choice admits

provided access to its network servers from any telephone number, see Appellee Br. 9,

and which we have held permitted at least limited communication with any subscriber.

Accordingly, these lines fail to meet the statutory definition of “private communication

service” even if we were to assume that “the subscriber” constructively included USA

Choice’s customers.




2007-5077                                   25
       The Court of Federal Claims further erred in accepting USA Choice’s argument

that “by terminating a call when a caller fails to properly authenticate that he or she is a

USA Choice customer, USA Choice demonstrates its priority of use.” USA Choice, 73

Fed. Cl. at 800. Under this definition, any line could be construed as providing priority

use. USA Choice’s termination of calls upon failed authentication attempts does not

meaningfully differ from the choice of any telephone subscriber to “hang up” upon

receiving an unwanted call. Because we must focus on the inherent capabilities of the

services provided to USA Choice as discussed supra, which indisputably allowed

anyone to dial the telephone numbers associated with USA Choice’s POPs and thus

communicate with USA Choice’s network servers through the local telephone system,

USA Choice’s unilateral decision to terminate calls received from non-customers cannot

establish its “exclusive or priority use” of these services.

                                              c.

       In light of this analysis, we need not address arguments related to “private lines”

or prior tax exemptions, neither of which we find particularly helpful. Finally, we note

that—as with our “local telephone service” analysis—our conclusions present no

conflicts with the revenue ruling relied upon by the government. See Rev. Rul. 78-437,

1978-2 C.B. 266 (holding that where a communication system meeting the definition of

section 4252(d), “in addition to providing private communication between each of the

stations in the system, also provides direct access from each station to local telephone

service,” the “charge for the lines that give access to the local telephone service . . . is

not within the exemption provided by section 4252(d) of the Code”).




2007-5077                                     26
      We therefore hold that the communication services purchased by USA Choice do

not meet the statutory definition of a “private communication service” and for that reason

are not exempt from the communications excise tax of section 4251(a)(1).

                                     CONCLUSION

      For the above reasons, we conclude that the Court of Federal Claims erred in

holding that USA Choice’s incoming-only lines were not subject to the communications

excise tax as local telephone service and in holding that USA Choice’s lines were

exempt as private communication services, and thus its judgment is

                                      REVERSED.




2007-5077                                  27
 United States Court of Appeals for the Federal Circuit
                                        2007-5077

                       USA CHOICE INTERNET SERVICES, LLC,

                                                                 Plaintiff-Appellee,

                                             v.


                                    UNITED STATES,

                                                                 Defendant-Appellant.

Appeal from the United States Court of Federal Claims in 05-CV-525, Judge Charles F.
Lettow.

DYK, Circuit Judge, concurring in part and dissenting in part.

       I join the majority opinion with the exception of Part II.B.2.b. For the reasons

stated by the majority, the services at issue constitute “local telephone service” within

the definition of 26 U.S.C. § 4252(a)(1). They are not within the “private communication

service” exemption of 26 U.S.C. § 4252(d) because they do not meet the basic

requirement of providing a distinct “communication service” in addition to local

telephone service.      However, the majority alternatively holds that the “private

communication service” exemption does not apply here because USA Choice does not

have “exclusive or priority use” of its lines as required by 26 U.S.C. § 4252(d)(1)(A). I

respectfully disagree with this alternative holding.

       In reaching this alternative holding, the majority properly rejects the reasoning of

the Court of Federal Claims that USA Choice’s customers are “subscribers” within the

language of the statute.      USA Choice’s customers may subscribe to the internet

services offered by USA Choice, but they do not “subscribe” to the relevant telephone
company services at issue in this case.      The only subscriber is USA Choice itself.

However, USA Choice, as the subscriber, does have “exclusive or priority use” of its

lines. In my view, USA Choice has “exclusive use” of its lines, because the lines cannot

be used to direct calls to any other party. When a caller dials one of the telephone

numbers associated with USA Choice’s POPs, the call is routed at the central office

over the dedicated circuits and to the POPs. Any call routed onto these circuits can

only reach USA Choice.

       The majority suggests that USA Choice does not enjoy exclusive or priority use

of those lines because “anyone else on the [Public Switched Telephone Network] was

free to dial USA Choice’s access numbers and necessarily made use of USA Choice’s

dedicated lines to connect with its POPs.” Maj. Op. at 24. I disagree. The statute

focuses on the subscriber’s entitlement, and here the subscriber is the only party who

can be reached by a call routed over the lines at issue. PBX service, the very service

for which the exemption was designed, similarly can enable the general public to reach

the subscriber. A PBX system connected to the local exchange allows anyone to call in

to and access the telephone stations within the system. Thus the exemption cannot be

denied on the basis that the subscriber’s use is not exclusive or priority use where the

general public can use the lines to reach the subscriber.

       While I believe that the “exclusive or priority use” requirement was satisfied, I

nonetheless agree that the majority reaches the correct result in holding the exemption

unavailable. In my view, the exemption is unavailable for the reasons stated in Part

II.B.2.a of the majority opinion.




2007-5077                               2
