On Monday, the Second Circuit reversed a district court’s decision, affirming a bankruptcy’s court decision, granting WorldCom Debtors’ objections to an IRS proof of claim, and a motion for taxes that WorldCom previously paid.
The decision centered on how “local telephone service” was interpreted, because the federal tax code requires the addition of a three-percent tax to the purchase of a local telephone service. At issue was WorldCom’s purchase of “central-office-based remote access” (COBRA), a service that gave customers the ability to connect to the Internet and WorldCom’s network through a regular phone line.
The bankruptcy court and district court concluded that COBRA was not a local telephone service, and therefore not subject to the three-percent tax. The Second Circuit disagreed.