In re Inc.

• Citation: 55 Bankr.Ct.Dec. 5,449 B.R. 655
• Decision Date: 15 June 2011
• Docket Number: No. 02–13533 (AJG).,02–13533 (AJG).
• Parties: In re WORLDCOM, INC., et al., Reorganized Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

449 B.R. 655

107 A.F.T.R.2d 2011-2590

2011-2 USTC P 70,302

55 Bankr.Ct.Dec. 5

In re WORLDCOM, INC., et al., Reorganized Debtors.

No. 02–13533 (AJG).

United States Bankruptcy Court, S.D. New York.

June 15, 2011.

Weil Gotshal & Manges LLP, By: Alfredo R. Perez, Esq., Houston, TX, for the Reorganized Debtors.United States Department of Justice, United States Attorney's Office for the Southern District of New York, By: Benjamin H. Torrance, Esq., New York, NY, for the Internal Revenue Service.

OPINION, FOLLOWING REMAND FROM THE DISTRICT COURT, REGARDING ADDITIONAL FINDINGS OF FACT AND CONCLUSIONS OF LAW WITH RESPECT TO THE REORGANIZED DEBTORS' (I) OBJECTION TO PROOF OF CLAIM NO. 38365, AND (II) MOTION FOR A DETERMINATION OF REFUND RIGHTS PURSUANT TO SECTION 505(a)(1) OF THE BANKRUPTCY CODE

ARTHUR J. GONZALEZ, Chief Judge.

This matter is before the Court on remand from the District Court for certain additional determinations and findings of fact concerning a dispute between, on one side, Verizon Business Global LLC, successor in interest to MCI, Inc., together with certain of its affiliates as reorganized debtors in the above captioned bankruptcy case (collectively, the “Debtors”), and, on the other side, the Internal Revenue Service (the “IRS”). In that regard, the parties currently have motions before the Court seeking entry of their respective proposed findings of fact and conclusions of law. The parties' underlying dispute concerns the Debtors' liability for the telecommunications excise tax under 26 U.S.C. § 4251 et seq. (the “Excise Tax”) with respect to central office based remote access (“COBRA”) services that the Debtors purchased from various Local Exchange Carriers (the “LECs”).¹

Prior to issuing WorldCom I, the Court had before it (i) a proof of claim filed by the IRS for certain amounts it alleged were due as Excise Tax; (ii) the Reorganized Debtors' objection (the “Claim Objection”) to that proof of claim; and (iii) the Reorganized Debtors' motion (the “Refund Motion”) seeking a refund of amounts that had already been paid to the IRS representing Excise Tax. On June 1, 2007, this Court issued its opinion granting both the Claim Objection and the Refund Motion, WorldCom I, 371 B.R. 19, and orders (the “Orders”) to that effect were subsequently entered. The Orders were appealed to the District Court of the Southern District of New York, which issued its opinion reversing this Court's Orders and remanding the case for further consideration. See Worldcom II, Slip Op., 2009 WL 2432370.

In its opinion, the District Court noted that this Court had relied primarily upon a Court of Federal Claims opinion in USA Choice Internet Service, LLC v. U.S., 73 Fed.Cl. 780 (2006), when this Court reasoned that “section 4252(a) requires that the taxpayer have the privilege to both initiate and receive telephonic quality communication. WorldCom I, 371 B.R. at 28.” ² Worldcom II, 2009 WL 2432370 at *2. Prior to the District Court issuing its ruling, however, the decision of the Federal Court of Claims on that point had been reversed by the Federal Circuit Court in USA Choice Internet Services, Inc. v. U.S., 522 F.3d 1332 (Fed.Cir.2008). The District Court issued a ruling agreeing with the Federal Circuit Court's interpretation of section 4252(a), and for that reason reversed this Court's orders and remanded the case for further consideration.

Specifically, the District Court requested that this Court “determine whether the COBRA service purchased by Debtors afforded ‘access' to a ‘local telephone system’ as well as ‘two-way’ or ‘full duplex’ ‘telephonic quality communication.’ ” The District Court further referenced “at least two principal factual issues that must be resolved” to make such determination. The first factual issue referenced was that

the parties dispute the nature and function of Primary Rate Interface (“PRI”) circuits and services in relation to the COBRA service. (More specifically, the parties dispute in the first place whether PRI lines are included in the COBRA service purchased by Debtors. They also dispute whether the data stream produced through the COBRA service could be utilized by telephone equipment such as a Private Branch Exchange (“PBX”) to enable communication by telephone between the Debtors and a party connected to the local telephone system. They also dispute whether, even if the data stream may be so utilized, it is within the power of the Debtors to plug in such a PBX.)

Worldcom II, Slip Op., 2009 WL 2432370 at *4. Citing this Court's decision, the District Court indicated that a second factual issue requiring resolution was the parties dispute whether the COBRA service can transmit VoIP communication. Worldcom II, Slip Op., 2009 WL 2432370 at *4 (citing WorldCom I, 371 B.R. at 28.). The District Court further noted that “these issues go to both prongs of section 4252(a) and require factual findings from the Bankruptcy Court.” Id.³

In remanding for these limited factual findings, the District Court also noted that it agreed with certain determinations reached by this Court. Specifically, the District Court noted that it agreed with this Court's reasoning that

the capability of COBRA service must be assessed as purchased, not in relation to possible configurations ... the Debtors only have the privileges that they purchased. WorldCom, 371 B.R. at 29. Neither self-imposed limitations nor unpurchased hypothetical configurations need be considered in determining whether the COBRA system purchased by Debtors afforded connectivity to a “local telephone system” and “two-way” “telephonic quality communication.” The Court need only determine what was purchased and what uses of those purchases the Debtors may make of their own volition and without having to seek permission or additional purchases of the LECs or any other party.

Worldcom II, Slip Op., 2009 WL 2432370 at *4.

In light of the District Court's ruling, thereafter, the Debtors filed a motion seeking additional findings of fact and conclusions of law, accompanying the motion with proposed findings and conclusions. The IRS responded by filing a motion seeking entry of its own proposed findings of fact and conclusions of law, and opposing entry of the Debtors proposal. The parties contend that the factual record that was developed before this Court at the evidentiary hearing conducted prior to the issuance of WorldCom I has sufficient elements to make any additional findings and conclusions required by the District Court. A hearing on these motions was heard on March 30, 2011.

ADDITIONAL FINDINGS OF FACT ⁴

COBRA is a service technology that allows persons using dial-up modems (the “Dial–Up Users”) to access the Internet. LECs sold COBRA service, whereby the LECs would aggregate Dial–Up Users' data into transmission control protocol/Internet protocol (“TCP/IP”) packets, which are suitable for transmission over the Internet. With COBRA service, the Debtors plugged the output TCP/IP high speed data stream into their network, and sold access to the stream to ISPs, who in turn sold access to Dial–Up Users.

A Dial–Up User would make a telephone call using a modem (through a separately purchased local telephone service) to a telephone number associated with COBRA. The modem data traveled through the public switched telephone network (the “PSTN”), the same network on which traditional telephone calls travel. After traveling from the Dial–Up User using the PSTN, the data passed through a switch at the LECs' central office (the “LEC Switch”).

After passing through the LEC Switch, the data traveled along a PRI to the LECs Network Access Server (the “NAS”). The NAS contained several digital signal process “DSP” cards that aggregated and converted the data from the Dial–Up User's modem into TCP/IP packets. The NAS then transmitted the TCP/IP packets to a high speed router or a frame relay line card via a PRI, both located within the NAS. The TCP/IP packets then traveled on a high speed data line through the egress port of the NAS.

The PRI lines, the DSP cards, and all aspects of the NAS up until the Debtors plugged into the egress port, were COBRA equipment, and thus used by the LECs as part of their provision of COBRA service.

The parties agree that there was a path for telephonic quality communications all the way from the Dial–Up Users modem to the DSP card ⁵ contained in the NAS. The parties further agree that A PRI can plug into a PBX, which is a switch permitting traditional telephone voice communication. The service purchased by the Debtors did not include a PBX connection to the PRI lines. Further, the Debtors contracts did not permit them to access the PRI line to reconfigure it in any way.

The Debtors did not own any of the COBRA equipment. The equipment, including the NAS, all DSP cards, and all PRI lines remained with the LECs at their central offices. The demarcation point between the LECs' equipment and the Debtors' network lay at the egress point of the back of the NAS. The COBRA equipment was behind the LECs locked doors so that the Debtors could not physically access it. The Debtors only had electronic remote access to the COBRA service components. This electronic remote access allowed the Debtors to disable a modem if it was malfunctioning or make limited software changes.

The high speed data stream that resulted from COBRA service was not capable of providing the Debtors with telephonic quality communication. The Debtors could not have obtained a dial tone by plugging a telephone and a telephone jack into the stream. The Debtors were unable to plug in any equipment into the data stream that would have allowed them to have telephonic quality communications.

The PRI lines were capable of transmitting a telephonic quality communication. The capability of a telephonic quality communication existed from the Dial–Up User's modem, through the LEC Switch, to the PRI, but once the path reached the DSPs within the NAS,...