                       108 T.C. No. 23



                UNITED STATES TAX COURT



GOLDEN BELT TELEPHONE ASSOCIATION, INC., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 21677-95.                Filed June 16, 1997.


     P is a rural telephone cooperative corporation
that operates at cost. In addition to local telephone
service it provides its members with long-distance
service through connection with long-distance or
interstate (interexchange) carriers. P performs so-
called "billing and collection" (B & C) services in
respect of calls placed through such carriers. The
B & C services consist of recording data with respect
to members' long-distance calls, such as date, time,
destination, and duration of each call, answering and
resolving questions of members relating to their long-
distance bills, etc., and sending a single monthly
telephone bill to each member including charges for
both local and long-distance calls. Upon collection of
such charges it remits to the interexchange carrier an
appropriate portion of the amount paid for long-
distance calls. By retaining the remainder it is thus
compensated by the long-distance carrier for providing
B & C services.
                                 2

          Held, the income thus received from the long-
     distance carriers for B & C services is income for the
     performance of "communication services" within sec.
     501(c)(12)(B)(i), and is therefore not taken into
     account to comply with the "85 percent or more"
     requirement of sec. 501(c)(12)(A). Accordingly, since
     P is otherwise exempt from taxation under sec. 501(a),
     it does not lose that exempt status.


     Raymond P. Wexler, Todd F. Maynes, James M. Caplinger, and
Mark E. Caplinger, for petitioner.

     Robin W. Denick, Elizabeth Purcell, and Robert M. Fowler,
for respondent.


                              OPINION

     RAUM, Judge:   The Commissioner determined deficiencies of

$170,686, $164,484, and $90,241 in petitioner's Federal income

taxes for 1991, 1992, and 1993, respectively.   Petitioner, Golden

Belt Telephone Association, Inc., has filed a Motion for Summary

Judgment.   The facts are not in dispute; the Government "does not

take issue with petitioner's statement of Uncontested Facts" set

forth in petitioner's motion, and adopted those facts in its own

"Motion for Partial Summary Judgment".   Nor has the Government

disputed any facts stated in the "Preliminary Statement" of

petitioner's motion.   At issue is whether income received by a

local telephone cooperative allocable to billing and collection

services performed in respect of long-distance calls qualifies as

income received for the performance of "communication services"
                                  3

under section 501(c)(12)(B)(i),1 thus resulting in petitioner's

classification as an exempt corporation under section 501(a).2

     Petitioner is a Kansas rural telephone cooperative

corporation.    It was formed in January 1953 to provide

telecommunication services to its members.

     During 1991, 1992, and 1993, petitioner operated on a

cooperative basis to provide exchange and interexchange

telecommunications service to residences and businesses in its

     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
     2
         Sec. 501 provides:

     (a) Exemption From Taxation.--An organization described in
subsection (c) or (d) or section 401(a) shall be exempt from
taxation under this subtitle * * *

                   *    *     *   *    *     *   *

     (c) List of Exempt Organizations.--The following
organizations are referred to in subsection (a):

                   *    *     *   *    *     *   *

          (12)(A) * * * mutual or cooperative telephone companies
     * * * but only if 85 percent or more of the income consists
     of amounts collected from members for the sole purpose of
     meeting losses and expenses.

                 (B) In the case of a mutual or cooperative
            telephone company subparagraph (A) shall be
            applied without taking into account any income
            received or accrued--

                      (i) from a nonmember telephone
                 company, for the performance of
                 communication services which
                 involve members of the mutual or
                 cooperative telephone company,
                                  4

certified areas granted by the State Corporation Commission of

Kansas (KCC).   As a cooperative corporation, petitioner operates

at cost by allocating to its members any net margins in the form

of capital credits each year.    During the taxable years,

petitioner provided telephone service to approximately 3,500

members, who were located across approximately 2,300 square miles

of central and western Kansas.

     The billing and collection services (B & C services) consist

of the following:

     a.   Recording.   Petitioner records data with respect to

members' long-distance calls, such as the date and time when the

call is made, the destination of the call, and the duration of

the call.

     b.   Billing and Collection.     Petitioner sends a single

monthly telephone bill to each member that includes charges for

both local and long-distance calls.     Upon collection of such

charges, it remits to the interexchange carrier an appropriate

portion of the amount paid for long-distance calls.     In the event

that one of petitioner's members fails to make payment on its

long-distance telephone bill, petitioner is permitted to

disconnect the telephone service of the nonpaying member under

rules of the KCC.

     c.   Inquiry.   Petitioner answers inquiries from its members

with respect to long-distance calls, and resolves questions and

concerns regarding their long-distance telephone bills, calls,

and services.
                                  5

     Petitioner has performed B & C services since it was formed

in 1953.    Prior to the divestiture of AT&T in 1984, petitioner

did not separately account for the costs attributable to B & C

services.    Rather, these costs were included in a single

aggregate account with all of petitioner's costs of providing

telephone service to its members.     Petitioner was then

compensated by the long-distance carrier for all such costs by

retaining an appropriate portion of the toll rates paid by

petitioner's members for long-distance calls.

     As a result of the divestiture, the Federal Communications

Commission (FCC) revised the accounting requirements for

telephone cooperatives.    Under the new system, billing and

collection revenues were required to be reported separately from

other income sources.    Petitioner's operating methods and sources

of revenue remained the same.

     Under section 501(c)(12), a cooperative telephone company

qualifies as a tax-exempt entity if at least "85 percent * * * of

the income consists of amounts collected from members for the

sole purpose of meeting losses and expenses."     In determining

whether a telephone cooperative has satisfied the 85-percent

test, section 501(c)(12)(B) provides that income received "from a

nonmember telephone company, for the performance of communication

services which involve members" of the cooperative shall not be

taken into account.    At issue here is whether B & C services are

"communication services" within section 501(c)(12)(B).      If so,
                                   6

the amount of petitioner's gross income would without dispute

satisfy the 85-percent test for each of the years involved, and

petitioner is qualified as a tax-exempt entity.      As a result,

petitioner would be entitled to summary judgment with respect to

the deficiencies determined by the Commissioner.      The deficiency

notice contains a number of adjustments, all of which would

become irrelevant if petitioner were held to be a tax-exempt

corporation.

1.   History

      "Communication services" is not defined in the Code or the

Regulations.   However, the history of the treatment of telephone

cooperatives gives some insight into whether "communication

services" include B & C services.

      In Rev. Rul. 74-362, 1974-2 C.B. 170, 171, the IRS ruled

that amounts due a cooperative telephone company for services

rendered to a nonmember long-distance company must be treated as

nonmember income under the 85-percent test.       Section 501(c)(12)

provided, as it does now, that a mutual or cooperative telephone

company was tax exempt "only if 85 percent or more of the income

consists of amounts collected from members for the sole purpose

of meeting losses and expenses."       As a result of the ruling, most

telephone cooperatives stood to lose their tax-exempt status.

      In response, Congress added subparagraph B to section

501(c)(12).    In the legislative history of section 501(c)(12)(B),
                                 7

the change is explained by the Senate Finance Committee as

follows:

          The committee believes that the performance by a
     telephone cooperative of call-completion services
     involving calls to or from members of the cooperative
     is substantially related to the cooperative's
     performance of its statutory exempt function, and hence
     that actual or constructive "payments" from another
     telephone company for such services should not
     disqualify otherwise eligible telephone cooperatives
     from tax-exempt status.

          The committee understands that the approach set
     forth in the Service's ruling, described above, might
     well make the statutory exemption provision into a
     "dead letter," since few, if any, telephone
     cooperatives could prove that the constructive
     "payments" hypothesized by the Service do not cause the
     telephone cooperative to fail the 85-percent member-
     income test.

S. Rept. 95-762 (1978) at 2-3, 1978-2 C.B. 357, 358.   Prior to

the 1984 AT&T divestiture, "call-completion services" included

B & C services.3

     In 1986, the FCC issued a decision, In the Matter of

Detariffing of Billing & Collection Servs., 102 FCC2d 1150 (1986)

(1986 Detariffing Order), which resulted in the detariffing of

B & C services under Title II of the Communications Act of 1934,

ch. 652, tit. I, sec. 1, 48 Stat. 1064, 47 U.S.C. sec. 151 et

seq. (1937).   In the 1986 Detariffing Order, the FCC concluded

that B & C services performed for a non-member long-distance

company were not a "communication service", but were instead a



     3
        There is no explanation for the use of the term
"communication services" rather than "call-completion services"
in sec. 501(c)(12)(B).
                                   8

"financial and administrative service."    In the Matter of

Detariffing of Billing & Collection Servs., 102 FCC2d at 1168.

Therefore, the FCC would not regulate B & C services under Title

II of the Communications Act.   Id. at 1169.

      In reliance upon the 1986 Detariffing Order, the IRS ruled

in Tech. Adv. Mem. 91-11-001 (Apr. 23, 1989) (the TAM), that       B

& C services were not "communication services" for purposes of

section 501(c)(12)(B).   The issue in the TAM was whether an

exempt telephone cooperative's revenues, including B & C

revenues, should be treated as member income, nonmember income,

or excludable income under section 501(c)(12)(B).    Id. The TAM

chronicled the treatment B & C services had received from the FCC

since the divestiture of AT&T in 1984.    At first, the FCC

regulated the rate of return for B & C services that local

cooperatives offered to long-distance carriers.    However, in a

1985 Detariffing Notice, the FCC

      tentatively concluded that third-party billing and
      collection was "essentially a financial and
      administrative service," not "inherently a
      communications service" and accordingly proposed to
      "detariff" billing and collection provided to third
      parties. * * *

Id.   In 1986, the FCC cemented its conclusion of 1985 and

determined that B & C services were not "inherently a

communications service" under Title II of the Communications Act.

Id.   The FCC also required separate accounts for B & C revenues.

Id.
                                 9

      Based on the 1985 Detariffing Notice, the 1986 Detariffing

Order, and the changed accounting system, the TAM concluded

      that the billing and collection function is a
      "financial and administrative service." The functions
      comprising billing and collection (data processing,
      creating, mailing and collecting invoices), are common
      accounting functions, not unique to the telephone
      industry. * * * A "financial and administrative
      service" which credit card companies can perform as
      ably as LECs [local exchange carriers], cannot be a
      "communication service involving the completion of long
      distance calls." Treas. Reg. sec. 1.501(c)(12)-1(c).
      * * * [Fn. ref. omitted.]

Id.   Because the IRS concluded in the TAM that telephone

cooperatives provide B & C services in the same manner as other

nonexempt organizations, it ruled that B & C income is unrelated

trade or business income of the cooperative.   Id.   Recognizing

that the TAM "may have caused the inadvertent disqualification of

many telephone companies from tax exempt status", the IRS, in

Notice 92-33, 1992-2 C.B. 363, indicated that it would apply the

new provisions of the TAM for tax years beginning after December

31, 1990.   Thus, the IRS seeks to apply the TAM for the years at

issue here, namely, 1991, 1992, and 1993.

      Meanwhile, in 1989, the FCC issued another decision, In the

Matter of Pub. Serv. Commn. of Md., 4 FCC Rcd 4000 (1989) (1989

FCC Decision), in which it softened the position it had taken in

the 1986 Detariffing Order.   The decision stated:

           Billing and collection services of the kind
      provided by C&P for AT&T directly affect the conditions
      under which interstate carriers offer transmission
      services. The rates that LECs [local exchange
      carriers] charge for billing and collection directly
      affect the costs of providing interstate transmission
                               10

     service and hence the rates that IXCs [interexchange or
     long-distance carriers] must charge their interstate
     customers. Moreover, * * * DNP [disconnection for
     nonpayment] is integral to the billing and collection
     service that C&P provides to interstate carriers. * * *

          Finally, * * * AT&T must rely on the LECs to
     perform recording of call detail information * * *.
     * * * IXCs cannot, as a practical matter, offer
     interstate telephone service without obtaining recorded
     call detail information sufficient to collect payment
     from customers * * * .

          Besides "affecting" interstate communications, the
     billing and collection service that C&P provides for
     AT&T are also "closely related to the provision of
     [such] services," since billing and collection must
     occur accurately and efficiently for an interstate
     carrier to offer its services on an economically sound
     basis. From a technical perspective, DNP and the call
     detail recording function are two integral components
     of the billing and collection services that C&P
     provides to interstate carriers that are closely
     related to the interstate communication services of
     those carriers. DNP and recording are each performed
     as a function of the LECs' provision of interstate
     communications service * * * that other, non-carrier
     vendors of billing and collection services cannot
     provide.

          * * * When one interstate carrier is performing
     billing and collection for the interstate services of
     another interstate carrier under circumstances like
     those involved in C&P's relationship with AT&T the
     billing and collection service is incidental to
     interstate communications and subject to our Title I
     jurisdiction. [Fn. ref. omitted; emphasis supplied.]

4 FCC Rcd at 4005.

     Finally, in 1992, the FCC formally reversed the position it

had taken in the 1986 Detariffing Order.   In In the Matter of

Policies and Rule Concerning Local Exchange Carrier Validation

and Billing Information for Joint Use Calling Cards, 7 FCC Rcd

3528 (1992) (1992 FCC Decision), the FCC stated affirmatively
                                11

that B & C services are "communication services."   The FCC

explained the change as follows:

     We recognize that in the Billing and Collection
     Detariffing Order, the Commission found that LEC
     billing and collection for an unaffiliated IXC is "not
     a communication service for purposes of Title II of the
     Communications Act," but rather, "is a financial and
     administrative service." * * * Nevertheless, in
     recognizing its Title I ancillary jurisdiction over
     billing and collection services, the Commission found
     that such services were "incidental" to the
     transmission of wire communications and thus fell
     within the meaning of "wire communication" as defined
     in Section 3(a) of the Act. * * * These two findings
     appear inconsistent. Upon further analysis, we believe
     that the latter conclusion, that billing and collection
     is incidental to the transmission of wire communication
     and thus is properly considered a communications
     service under Section 3(a) of the Act, is the correct
     one. Billing and collection, of course, remains
     outside the scope of Title II because it is not a
     common carrier service. * * * [Emphasis supplied.]

7 FCC Rcd at 3533 n. 50.

      The Tenth Circuit, which includes Kansas, has acknowledged

the 1992 FCC Decision.   In Mical Communications, Inc. v. Spring

Telemedia, Inc., 1 F.3d 1031, 1039 (10th Cir. 1993), the court

stated that the FCC "appeared in that order, however, to retreat

from its characterization of billing and collection by LECs as

merely a 'financial and administrative' service."

2.   Analysis

     In 1934, Congress created the Federal Communications

Commission

     For the purpose of regulating interstate and foreign
     commerce in communication by wire and radio so as to
     make available, so far as possible, to all the people
     of the United States a rapid, efficient, Nation-wide,
     and world-wide wire and radio communication service
                                  12

     * * *.

47 U.S.C. sec. 151 (1991).    Included in the FCC's jurisdiction is

"telephone exchange service", defined as

     service within a telephone exchange, or within a
     connected system of telephone exchanges within the same
     exchange area operated to furnish to subscribers
     intercommunicating service of the character ordinarily
     furnished by a single exchange * * *.

47 U.S.C. sec. 153(47) (1996).

     The phrase "communication service" is not defined in the

Communications Act, but it is used in the paragraphs describing

the purpose of the FCC and the definition of "telephone exchange

service".     It is also used in Title II of the Communications Act,

which describes common carriers.       Section 201(a) of 47 U.S.C.

makes it

     the duty of every common carrier engaged in interstate
     or foreign communication by wire or radio to furnish
     such communication service upon reasonable request
     therefor * * * [Emphasis supplied.]

47 U.S.C. sec. 201(a) (1991).    Section 201(b) provides that:

     All charges, practices, classifications, and
     regulations for and in connection with such
     communication service, shall be just and reasonable
     * * * [Emphasis supplied.]

47 U.S.C. sec. 201(b) (1991).

     When Congress enacted the current Code section 501(c)(12),

it incorporated the term "communication services" into the

statute.    Although there is nothing explicitly linking the

definition in section 501(c)(12) to the Communications Act or the

FCC, the FCC has defined what is a communication service, at
                                 13

least in terms of B & C services, for over a decade without any

Congressional action.    In addition, the IRS itself relied heavily

on the FCC 1986 Detariffing Order to craft its position.     In

Tech. Adv. Mem. 91-11-001, the FCC is the sole authority for the

IRS' position that B & C services are not communication services.

Id.

       In 1992, the FCC stated unequivocally that B & C services

are "properly considered a communication service".     In the Matter

of Policies and Rule Concerning Local Exchange Carrier Validation

and Billing Information for Joint Use Calling Cards, 7 FCC Rcd

3528, 3533 n.50 (1992).    The Government's only direct authority

for its contrary position in Tech. Adv. Mem. 91-11-001 was the

FCC's 1986 Detariffing Order.    In 1992 the FCC acknowledged that

its prior position was incorrect.     There is no authority in

conflict with the latter FCC position.     To be sure, we are called

upon here to interpret the Internal Revenue Code, not some other

statute.    Nevertheless, in the context of the matter before us,

there is nothing to indicate that the definition of

"communication services" in section 501(c)(12) should be treated

differently from "communication services" in the Communications

Act.    We hold that "communication services" in section

501(c)(12)(B) includes B & C services.
                                    14

       The Government relies upon the TAM4 and contends that it is

not bound by the subsequent FCC rulings.      In the first place, a

TAM is generally merely a "Letter Ruling" given to a specific

taxpayer based upon facts relating to that taxpayer.      It is not a

ruling of general application.      In Watts Copy Sys., Inc. v.

Commissioner, T.C. Memo. 1994-124, the Court stated that "We

recognize that technical advice memoranda are not precedent."

Indeed, section 6110(j)(3) provides "Unless the Secretary

otherwise establishes by regulations, a written determination may

not be used or cited as precedent."      Moreover, unlike a revenue

ruling, a TAM is not published in the Cumulative Bulletin.        It

certainly stands on an even weaker footing than a revenue

ruling,5 which itself does not have the authority of a Treasury

regulation promulgated pursuant to section 7805.

       While it is true that the IRS need not follow decisions of

other agencies, the TAM's heavy reliance on the 1986 Detariffing

Order undermines the "authority" the IRS purports to give the

TAM.       Since the TAM relied on the 1986 Detariffing Order holding

that B & C services were mainly a "financial and administrative

service", the FCC's change of position upon more mature


       4
       We note that the IRS has very recently issued another
technical advice memorandum, Tech. Adv. Memo. 97-22-006 (May 30,
1997), relating to the factual situation of a different taxpayer,
which would appear to muddy the waters further.
       5
       However, the TAM involved herein may arguably be treated
as attaining a status equivalent to a revenue ruling by reason of
reference thereto in Notice 92-33, 1992-2 C.B. 363. See supra p.
9.
                                 15

reflection in the light of experience that B & C services are

"communication services" should be accorded weighty

consideration, particularly in view of the FCC's expertise in

this field.

     The Government also contends that billing and collection

"lacks any true connection to the act of completing long distance

calls and remains a service that many companies, not just

telephone cooperatives, could perform for nonmember telephone

companies."   The point is without merit.   It erroneously assumes

that billing and collection    consists merely of sending out a

bill and depositing a check.    Although the Government is correct

that any company could perform such limited services, there are

certain services included within B & C services that only the

cooperative can perform.

     Unlike an outside entity, only local telephone cooperatives

can record the time, duration, and destination of a call.    Local

cooperatives also can disconnect service for nonpayment.

Further, local cooperatives handle customer inquiries about a

range of matters relating to a customer's bill--a function that

cannot be performed by an outside entity. Thus, only the

cooperative can verify the accuracy of the bill first-hand.    See

1989 FCC Decision, 4 FCC Rcd at 4005 n.76.

     Based on the history of telephone cooperatives, the

treatment of B & C services by the FCC as a "communication

service", and the breadth of B & C services, B & C services
                                16

should, in our judgment, be included as "communication services"

under section 501(c)(12).   Accordingly, the income attributable

to such services should not be included in the 85-percent test.

As a consequence, more than 85 percent of petitioner's gross

income comes from member sources, and it therefore qualifies as a

tax-exempt entity.

                                     Petitioner's motion for

                               summary judgment will be granted,

                               and decision will be entered

                               for petitioner.   Respondent's

                               motion for partial summary judgment

                               will be denied.
