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Fifth Circuit Rules USF Contributions Income

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TEXAS – Companies receiving state and federal Universal Service Funds (USF) must pay federal income tax on those funds, according to a judgment from the Fifth Circuit earlier this month.

The appellate court upheld a summary dismissal from the U.S. District Court for the Western District of Texas against AT&T on a claim for the refund of more than $500M in income taxes paid to the Internal Revenue Service. The carrier maintained that more than $1.5B in state and federal USF contributions received between 1998 and 1999 should not be subject to federal income tax.

AT&T argued that contributions from the USF, which subsidizes affordable telephone service, should be considered non-shareholder contributions to capital rather than gross income.  Gross income is subject to regular income tax rates while non-shareholder contributions are not.  In rejecting AT&T’s claim, the court looked to the Government’s intent to supplement “lost revenues” the carrier incurred by providing service to high-cost and low-income subscribers.

Jonathan began his career as a journalist before turning his focus to law and policy. He is an attorney licensed in Texas and the District of Columbia and has worked previously as a political reporter, in political campaign communications and on Capitol Hill. He holds a B.A. in Journalism from the University of Washington and a J.D. from Villanova Law School, where he focused his studies on Internet and intellectual property law and policy. He lives in Washington, D.C., where he roots for Seattle sports teams and plays guitar in his free time.

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