Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-49

1972-1 C.B. 125

Sec. 446
Sec. 451

IRS Headnote

Advance payments received by a telephone company from subscribers representing a basic charge applied to the following month's telephone service may be deferred in accordance with Revenue Procedure 71-21.

Full Text

Rev. Rul. 72-49

Advice has been requested whether agreements under which telephones are installed in the homes or offices of subscribers and under which the subscriber is billed, in advance, are contracts for services or rental agreements.

The corporation is a regulated public utility in the business of providing communication by telephone. It uses the accrual method of accounting and reports its taxable income on the basis of a calendar year. Subscribers are billed in advance for a basic monthly charge. Each bill also shows the actual charges for telephone calls made and not falling within the basic monthly charge. Thus, each bill generally encompasses an advance charge applicable to the following monthly period indicated on the bill and charges during the current monthly period for calls actually made that are not encompassed in the basic monthly charge (usually long-distance calls). For Federal income tax purposes, at the end of each month, including year end, that portion of the charges billed during the month applicable to the following month is deferred by the corporation and included in its income for the following month. Thus, for example, on a billing from December 21, 1970, to January 20, 1971, that portion allocable to the period January 1 to January 20, 1971, would be deferred and not included in income until January 1971.

Section 451 of the Internal Revenue Code of 1954 provides that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Revenue Procedure 71-21 contains procedures under which accural method taxpayers in certain specified and limited circumstances may defer the inclusion in income for Federal income tax purposes of payments received (or amounts due and payable) in one taxable year for services to be performed by the end of the next succeeding taxable year.

Section 3.08 of Revenue Procedure 71-21 provides, in pertinent part, that it has no application to amounts received as prepaid rent.

Section 3.11 of Revenue Procedure 71-21 provides that, under the rules contained in the Revenue Procedure, the amount of any advance payment includible as gross receipts in gross income in the taxable year of receipt by the taxpayer shall be no less than the amount of such payment included as gross receipts in gross income for purposes of his books and records and all reports (including consolidated financial statements) to shareholders, partners, other proprietors or beneficiaries and for credit purposes.

The issue, in the instant case, turns on the question of whether any advance payments received are for services to be performed or are for rent. If such payments are held to be for rent then no deferral of the advance payments is permitted. If held to be for services to be rendered, then the provisions of Revenue Procedure 71-21, permit a deferral of certain of such receipts to the following year.

Revenue Ruling 68-109, C.B. 1968-1, 10, in considering the question of whether switchboard or dial switching apparatus installed in furnishing communications to tax-exempt organizations pursuant to a contract qualified as "section 38" property, concluded that such contract was, in fact, a service contract. The Revenue Ruling states, in part, as follows:

The property in question here is not owned or leased by the governmental unit or exempt organization. The taxpayer retains all ownership in, and possession and control over, the equipment. Hence, the agreement entered into between the taxpayer and the customer is not a sale or lease but a service contract. Furthermore, the services furnished by the taxpayer and the manner in which they must be furnished are described in the tariffs on file with the Federal Communications Commission, and with pertinent state public utility regulatory agencies. These tariffs constitute a public offering by the utility which, when accepted by the subscribers, creates a contract embodying the terms and conditions of that tariff. The tariff provisions do not authorize the taxpayer to sell or lease any of the property in question.

Accordingly, in the instant case, it is held that advance payments by subscribers are for telephone services and not rent. Therefore, they are subject to the provisions of Revenue Procedure 71-21.