The opinion of the court was delivered by: Katherine B. Forrest, District Judge.
The United States Internal Revenue Service (the "I.R.S.") appeals from an order of the Bankruptcy Court, In re Worldcom, Inc., 449 B.R. 655 (Bankr. S.D.N.Y. 2011) ("Worldcom III"), which (i) granted Debtors'*fn1 objection to a proof of claim filed by the I.R.S. relating to unpaid telecommunications excise taxes with respect to the Debtors' purchase of Central Office Based Remote Access ("COBRA") service, and (ii) determined in Debtors' favor a refund motion for approximately $38 million in previously paid excise taxes for the same service. As the I.R.S. states, "[T]he issue behind both the debtors' objection to the I.R.S. payment request and their refund motion is the same: whether the federal communications excise tax applies to COBRA services." Brief of the Appellant ("I.R.S. Br.") at 7.
The outcome of this appeal depends entirely on whether the COBRA service as purchased by the Debtors constituted a "local telephone service" as defined in 26 U.S.C. § 4252(a). If it did, then Debtors purchased such a service, are liable for excise taxes claimed, and are not entitled to a refund of taxes previously paid. If, on the other hand, the COBRA service does not meet the statutory definition, then Debtors are entitled to the refund and owe nothing more.
The determination of whether or not the COBRA service meets the statutory definition is surprisingly complicated on what is now an agreed factual record. See I.R.S. Br. at 7 n.5 ("The government is not challenging findings of fact in this appeal"). The determinative issue comes down to a judicial finding as to whether, when the undisputed facts are laid against the statutory definition of "local telephone service," they meet or fall short of what Congress intended. As set forth below, they fall short. Accordingly, the judgment of the Bankruptcy Court is AFFIRMED.
This matter has been between this Court and the Bankruptcy Court for almost five years. The technology underlying this proceeding has been superceded by other ways of accessing the Internet. See, e.g., Worldcom III, 449 B.R. at 658; see also Hr'g Tr. at 66:25-67:20 (Bankr. S.D.N.Y. Feb. 1, 2006) (Testimony of Debtors' Expert, John Anderson). The issue in this appeal does not, therefore, have prospective application to how a "local telephone service" would be defined with respect to today's most utilized technologies for Internet connection.
During the time that this matter has been between the Bankruptcy Court and this Court, there have been a number of opinions that have extensively described the technology at issue and the procedural posture of this case. See, e.g., In re Worldcom, Inc., 371 B.R. 19 (Bankr. S.D.N.Y. 2007) ("Worldcom I"); In re Worldcom, Inc., No. 07 Civ. 7414, 2009 WL 2432370 (S.D.N.Y. Aug. 7, 2009) ("Worldcom II"). The Court assumes familiarity with those opinions.
In WorldCom II, this Court remanded the action to the Bankruptcy Court for two additional findings of fact that would assist it in determining whether the COBRA service met the statutory definition of a "local telephone service." 2009 WL 2432370, at *2. The factual questions this Court posed were:
(1) whether the COBRA services purchased by the Debtors afforded "access" to a "local telephone system"; and (2) whether that system as purchased provided for "two-way" or "full-duplex" "telephonic quality communication." Id. at *4. In connection with those factual issues, this Court identified two factual disputes that needed to be resolved: (a) the nature and function of the Primary Rate Interface ("PRI") circuits and services in relation to COBRA (and whether these PRI's enabled "access" via a connection to a PBX line); and (b) whether the COBRA service could transmit Voice Over Internet Protocol ("VoIP") communication in a manner that would be considered "telephonic quality communication." Id.
Upon remand, on December 13, 2010, the parties submitted Proposed Findings of Fact and Conclusions of Law to the Bankruptcy Court. On June 15, 2011, the Bankruptcy Court found the COBRA system as purchased by the Debtors did not provide "access" to a local telephone service, but only provided access to high-speed data stream which was not capable of telephonic quality communication. Worldcom III, 449 B.R. at 659. As discussed below, the Bankruptcy Court focused on the fact that the Debtors only purchased the output of the COBRA service--that is, the high-speed data stream that emerged from the COBRA system at its "point of egress." Id. The Bankruptcy Court also found that the "speed of service that COBRA could maintain would result in communication being garbled and unintelligible when converted from data to voice. Therefore the COBRA service could not provide telephonic quality communication for computer to computer VoIP." Id. at 660. The Bankruptcy Court granted the Debtors' motion and the relief requested in Debtors' refund motion. Id. at 663. The I.R.S. now appeals that ruling.
Because the I.R.S. is "not "challenging any findings of fact in this appeal," I.R.S. Br. at 7 n.5, this Court's ruling is based upon the facts set forth in the Bankruptcy Court's June 15, 2011 decision.
The standard of review applicable to matters within core bankruptcy jurisdiction is governed by the Federal Rules of Bankruptcy Procedure. On appeal, the court "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Fed. R. Bankr. P. 8013.
While normally a district court would review a bankruptcy judge's findings of fact for clear error, id.; see also Solow v. Kalikow ("In re Kalikow"), 602 F.3d 82, 91 (2d Cir.2010) ("[f]indings of fact are reviewed for clear error"), that is unnecessary here since the I.R.S. has ...