Guidance on characterizing gross receipts from telecommunications services.

• Author: Dell, Michael

In Rev. Rul. 2011-24, the IRS provided guidance for determining whether a taxpayer that provides telecommunications services derives gross receipts from services, leasing or renting property, or a combination of the two, for purposes of the domestic production activities deduction under Sec. 199.

Facts

The revenue ruling presents three hypothetical situations.

Situation 1: Z corporation provides telecommunications services, including the transmission of voice, data, and video communications. Z contracts with A corporation, which has multiple business locations and is not in the telecommunications industry, to transmit A's telecommunications. Under the contract, Z must transmit A's telecommunications at A's desired times to A's desired destinations and at a certain speed. A must pay Z for transmitting the telecommunications. If Z cannot transmit A's telecommunications according to the terms of the contract, then Z must give A a service credit.

Z's optical and digital transmission equipment, usually a synchronous optical network (SONET) ring, and the associated public switched telephone network (PSTN) are used to transmit A's telecommunications. The SONET ring interconnects multiple business locations designated by A to transmit telecommunications among A's business locations without transmitting them to Z's PSTN. Additionally, the SONET ring connects to Z's central office, switching center, or remote terminal to transmit telecommunications to and from Z's PSTN.

The PSTN consists primarily of fiber optic cable and copper cable that connects switching centers with each other and to remote terminals. The PSTN is owned by Z and is not dedicated to A or to any of Z's other customers. The PSTN provides different pathways to transmit telecommunications to and from A's business locations. The SONET ring and PSTN assets used to transmit A's telecommunications include: (1) network electronics, such as multiplexers, switches, routers, digital cross-connects, and optical and digital transmission equipment; (2) fiber optic cable and/or copper cable; (3) network facilities such as a central office; and (4) software.

A owns telecommunications equipment that connects with the SONET ring to allow transmission of the telecommunications among A's business locations or to the PSTN and transmission of others' telecommunications to A from the PSTN. A's equipment includes a router, channel service or data service unit, and a diagnostics modem (customer-premises equipment). Z is not required to provide services related to A's customer-premises equipment.

Z owns, installs, operates, and maintains the SONET ring and PSTN. Z will replace any SONET ring and PSTN assets when required. Under the contract, A must grant Z reasonable access to A's premises to install, inspect, test, rearrange, maintain, repair, or remove any SONET ring assets located on A's property. Z repairs and maintains the SONET ring and PSTN at no additional charge to A. A cannot install, inspect, test, rearrange, maintain, repair, or remove any component of the SONET ring or PSTN.

Situation 2: The facts are the same as in Situation 1, except that A does not have multiple business locations, and Z uses a dedicated circuit, instead of a SONET ring, to transmit A's telecommunications to the PSTN and others' telecommunications from the PSTN. Z transmits all telecommunications to or from A through the PSTN. Z's dedicated circuit comprises Z's equipment...