Rev. Rul. 57-137

The Internal Revenue Service has been asked to reconsider its position relating to the application of the communications taxes in respect of typical switchboard and internal telephone systems utilized by taxicab companies, in view of the decisions in the cases of Yellow Cab Company of Cleveland v. Carey (141 F.Supp. 379) and Yellow Cab Company of Alameda County v. United States (144 F.Supp. 158).

The telephone facilities utilized by the different cab companies are not in all respects alike, but they may be described as being generally similar. Switchboards and switching equipment, to which trunk lines from local telephone exchanges and tie lines from other private branch exchanges may be connected, are installed at the cab companies' dispatching centers. Lines from the switchboards are also connected to telephone instruments (call box phones) located at cab stands, hotels, hospitals, etc., generally within the subscriber's local service area. Operators at the dispatching centers may receive incoming calls for cab service through these call box lines or through the local telephone exchange facilities. The operator then may ring a call box at a cab stand near the locality where the cab service is desired and relay the request for service, orally, to the cab driver who answers. At other times newly arrived drivers signal or call the dispatching center from cab stand call boxes to report their availability. Although in some cases it is possible to interconnect these call box lines with the local telephone exchange facilities, since both local exchange trunks and the call box lines may lead into the dispatching center switchboard, usually this is done only in cases of emergency.

Section 4251 of the Internal Revenue Code of 1954 imposes a tax on amounts paid for certain communication services, including `local telephone service' and `leased wire, teletypewriter, or talking circuit special service.' Section 4253(f) of the Code exempts from the tax amounts paid for leased wire, teletypewriter, or talking circuit special service utilized by a common carrier in the conduct of its business as such. This exemption does not extend to amounts paid for local telephone service.

A taxicab company is considered to be a common carrier for purposes of the above exemption. The applicability of the exemption to amounts paid for telephone facilities and services utilized by a taxicab company in the conduct of its business depends, then, upon whether the service is classified as `local telephone service' or as `leased wire, teletypewriter, or talking circuit special service.'

It has been the position of the Service that where it is possible to connect telephone instruments to the local exchange service through switching equipment on the customer's premises, the instruments and switching equipment constituted for communications tax purposes, a private branch exchange system and therefore, was subject to the tax on local telephone service. In the case of lines connecting such instruments to the private branch exchange system, the local telephone service tax applied where such lines terminated within the customer's local service area. However, where such lines extended beyond the boundary of the customer's local service area, the leased wire tax described in section 4252(d) of the Code applied. Common carriers could thus be granted exemption from tax, under section 4253(f) of the Code, only on charges for the lines classified as leased wire service, since the exemption does not apply to local telephone service.

Pursuant to the position stated above, the Service has consistently held that where the call box telephones and lines are located in the same local exchange areas as the dispatching centers and connection with local telephone service is available, the tax on local telephone service applies to the charges for the call box telephones and lines. Where such connection was not possible, the Service has held the lines to constitute leased wire service. This position was based upon the possible use of the installation.

However, in the cases cited above, the district courts found that that part of the systems connecting the cab companies' dispatching centers with the call boxes comprises service of the kind described under section 4252(d) of the Code. In reaching this conclusion, cognizance was taken of the fact that although the call boxes could be connected with outside telephones through the telephone company's local exchange facilities, this was done only in emergency situations, such as urgent police calls. Thus, the decisions of the courts are based upon the actual use of the facility in question, as opposed to their possible use.

Accordingly, it is now held that where in actual practice an arrangement of telephone facilities and equipment is used exclusively for internal communications, as in the case of the installations connecting the cab companies' dispatching centers with the call boxes, such an arrangement is of the kind contemplated by section 4252(d) of the Code, even though connection with a local telephone exchange system is possible by means of existing equipment and even though there is an occasional use of the facilities for emergency calls, such as fire or police calls. Therefore, the exemption under section 4253(f) of the Code will apply to amounts paid for such services if they are utilized by a common carrier, such as a taxicab company, in the conduct of its business as such.