[Federal Register Volume 63, Number 242 (Thursday, December 17, 1998)]
[Proposed Rules]
[Pages 69585-69589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33346]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 49

[REG-118620-97]
RIN 1545-AV63


Communications Excise Tax; Prepaid Telephone Cards

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed rules for the application of 
the communications excise tax to prepaid telephone cards (PTCs). The 
regulations implement certain changes made by the Taxpayer Relief Act 
of 1997. They affect certain telecommunications carriers, resellers, 
and purchasers of PTCs. This document also provides notice of a public 
hearing on these proposed regulations.

DATES: Written comments must be received by March 17, 1999. Outlines of 
topics to be discussed at the public hearing scheduled for May 5, 1999, 
must be received by April 14, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-118620-97), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
118620-97), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in room 2615, Internal 
Revenue Building, 1111

[[Page 69586]]

Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the hearing, submission of 
written comments, and to be placed on the building access list to 
attend the hearing, LaNita VanDyke, (202) 622-7180; concerning the 
regulations, Bernard H. Weberman (202) 622-3130 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 
20224. Comments on the collection of information should be received by 
February 16, 1999. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in this proposed regulation is in 
Sec. 49.4251-4(d)(2). This information is required to document the 
status of certain purchasers of PTCs. The collection of information is 
required to obtain a benefit. The likely respondents and recordkeepers 
are businesses and small businesses.
    Estimated total annual reporting burden: 24 hours.
    Estimated average burden per respondent: .25 hour.
    Estimated number of respondents: 96.
    Estimated annual frequency of responses: On occasion.
    Estimated total annual recordkeeping burden: 10 hours.
    Estimated average annual burden per recordkeeper: 1.2 hours.
    Estimated number of recordkeepers: 8.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 4251 imposes a 3 percent excise tax on amounts paid for 
three communications services: local telephone service, toll telephone 
service, and teletypewriter exchange service. The tax is paid by the 
person paying for those communications services and, under section 
4291, is collected by the person receiving that payment.
    Section 1034 of the Taxpayer Relief Act of 1997 added section 
4251(d), effective November 1, 1997, which provides special rules for 
the treatment of PTCs. Under section 4251(d), a PTC is any card or 
similar arrangement that permits its holder to obtain communications 
services and to pay for such services in advance. The face amount of 
the PTC is treated as an amount paid for communications services and 
that amount is treated as paid when the PTC is transferred by any 
telecommunications carrier to any person that is not a carrier.

Explanation of Provisions

    These proposed regulations provide rules relating to the imposition 
of tax, the determination of the face amount upon which tax is imposed, 
and the identification of the person liable for tax and the person 
responsible for collecting tax. The purpose of the rules for 
determining the face amount is to implement Congressional intent that 
the tax be imposed on a PTC's retail value, whether a carrier sells a 
PTC at retail or at wholesale to a transferee reseller. In certain 
limited circumstances, these rules permit the use of a safe harbor 
under which the face amount is equal to $0.30 per minute of service 
provided. Because the IRS and Treasury expect the retail value of PTCs 
to change over time and intend to review the per-minute rate at regular 
intervals, this safe harbor expires on December 31, 2001.
    For purposes of determining whether a transferor is a carrier and 
whether a transferee is a person that is not a carrier, the proposed 
regulations adopt the definition of telecommunications carrier used by 
the Federal Communications Commission. In general, this definition 
treats any provider of telecommunications service as a 
telecommunications carrier. In addition, the proposed regulations 
provide that a transferor carrier is not responsible for collecting the 
tax if it has been notified, in writing, by the purchaser of the 
purchaser's status as a carrier and has no reason to believe otherwise. 
Providing that notification does not relieve the purchaser from 
liability for tax if the purchaser is not, in fact, a carrier. 
Furthermore, the rules in the Excise Tax Procedural Regulations (26 CFR 
part 40) relating to collectors of tax under chapter 33 of the Internal 
Revenue Code do not apply to noncarrier purchasers.
    During the development of the proposed regulations, the IRS and 
Treasury received inquiries concerning the treatment of multi-use cards 
and enhanced services cards. Multi-use cards are PTCs that can also be 
used to purchase items other than communications services, such as gas, 
groceries, etc. Enhanced services cards are PTCs that can also be used 
to purchase nontaxable informational services such as stock quotations 
or access to a 900 number. The proposed regulations do not include 
special rules for multi-use or enhanced services cards. However, the 
IRS and Treasury request comments on this issue.
    The regulations are proposed to be effective at the beginning of 
the first calendar quarter after they are published as final 
regulations. Carriers and transferees may, however, rely on the 
proposed rules in determining the treatment of PTCs transferred before 
the effective date.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It also has been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) does not apply to these regulations. It is hereby certified 
that the collection of information in these regulations will not have a 
significant economic impact on a substantial number of small entities. 
This

[[Page 69587]]

certification is based on the fact that the time required to prepare or 
retain the notification is minimal and will not have a significant 
impact on those small entities that are required to provide 
notification. Furthermore, notification is provided only once to each 
seller. Accordingly, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, this notice 
of proposed rulemaking will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for Wednesday, May 5, 1999, at 
10 a.m. in room 2615, Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC. Due to building security procedures, 
visitors must enter at the 10th Street entrance, located between 
Constitution and Pennsylvania Avenues, NW. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 15 minutes before the hearing starts. For 
information about having a visitor's name placed on the building access 
list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT 
caption.
    An outline of the topics to be discussed and the time to be devoted 
to each topic (a signed original and eight (8) copies) must be 
submitted by any person that wishes to present oral comments at the 
hearing. Outlines must be received by April 14, 1999.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. A period of 
10 minutes will be allotted to each person for making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving requests to speak has passed. Copies 
of the agenda will be available free of charge at the hearing.
    Drafting Information. The principal author of these regulations is 
Bernard H. Weberman, Office of Assistant Chief Counsel (Passthroughs 
and Special Industries). However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 49

    Excise taxes, Reporting and recordkeeping requirements, Telephone, 
Transportation.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 49 is proposed to be amended as follows:

PART 49--FACILITIES AND SERVICES EXCISE TAXES

    Paragraph 1. The authority citation for part 49 is revised to read 
as follows:

    Authority: 26 U.S.C. 7805, unless otherwise noted.
    Section 49.4251-4 also issued under 26 U.S.C. 4251(d).

    Par. 2. Section 49.4251-4 is added to read as follows:


Sec. 49.4251-4  Prepaid telephone cards.

    (a) In general. In the case of communications services acquired by 
means of a prepaid telephone card (PTC), the face amount of the PTC is 
treated as an amount paid for communications services and that amount 
is treated as paid when the PTC is transferred by any carrier to any 
person that is not a carrier. This section provides rules for the 
application of the section 4251 tax to PTCs.
    (b) Definitions.
    Carrier means a telecommunications carrier as defined in 47 U.S.C. 
153.
    Comparable PTC means a currently available dollar card or tariffed 
unit card (other than a PTC transferred in bulk or under special 
circumstances, such as for promotional purposes) that provides the same 
type and amount of communications services as the PTC to which it is 
being compared.
    Dollar card means a PTC the value of which is designated by the 
carrier in dollars (even if also designated in units of service), 
provided that the designated value is not less than the amount for 
which the PTC is expected to be sold to a holder.
    Holder means a person that purchases other than for resale.
    Prepaid telephone card (PTC) means a card or similar arrangement 
that permits its holder to obtain a fixed amount of communications 
services by means of a code (such as a personal identification number 
(PIN)) or other access device provided by the carrier and to pay for 
those services in advance.
    Tariff means a schedule of rates and regulations filed by a carrier 
with the Federal Communications Commission.
    Tariffed unit card means a unit card that is transferred by a 
carrier--
    (1) To a holder at a price that does not exceed the designated 
number of units on the PTC multiplied by the carrier's tariffed price 
per unit; or
    (2) To a transferee reseller subject to a contractual or other 
arrangement under which the price at which the PTC is sold to a holder 
will not exceed the designated number of units on the PTC multiplied by 
the carrier's tariffed price per unit.
    Transferee means the first person that is not a carrier to whom a 
PTC is transferred by a carrier.
    Transferee reseller means a transferee that purchases a PTC for 
resale.
    Unit card means a PTC other than a dollar card.
    Untariffed unit card means a unit card other than a tariffed unit 
card.
    (c) Determination of face amount--(1) Dollar card. The face amount 
of a dollar card is the designated dollar value.
    (2) Tariffed unit card. The face amount of a tariffed unit card is 
the designated number of units on the PTC multiplied by the tariffed 
price per unit.
    (3) Untariffed unit card--(i) Transfer to holder. The face amount 
of an untariffed unit card transferred by a carrier to a holder is the 
amount for which the carrier sells the PTC to the holder.
    (ii) Transfer to transferee reseller--(A) In general. The face 
amount of an untariffed unit card transferred by a carrier to a 
transferee reseller is, at the option of the carrier--
    (1) The highest amount for which the carrier sells an identical PTC 
to a holder that ordinarily would not be expected to buy more than one 
such PTC at a time (if the carrier makes such sales on a regular and 
arm's-length basis) or the face amount of a comparable PTC (if the 
carrier does not make such sales on a regular and arm's-length basis);
    (2) 165 percent of the amount for which the carrier sells the PTC 
to the transferee reseller (including in that amount, in addition to 
any sum certain fixed at the time of the sale, any contingent amount 
per unit multiplied by the designated number of units on the PTC); or
    (3) If the PTC is transferred before January 1, 2002, and is of a 
type that ordinarily is used entirely for domestic communications 
service, $0.30 multiplied by the maximum number of minutes of domestic 
communications service on the PTC.
    (B) Sales not at arm's length. In the case of a transfer of an 
untariffed unit card by a carrier to a transferee reseller otherwise 
than through an arm's-length transaction, the fair market retail value 
of the PTC shall be substituted for the amount determined in paragraph 
(c)(3)(ii)(A)(2) of this section.

[[Page 69588]]

    (4) Exclusion. Any separately stated state or local tax imposed on 
the furnishing or sale of communications services and any separately 
stated section 4251 tax are disregarded in determining, for purposes of 
this paragraph (c), the amount for which a PTC is sold.
    (d) Liability for tax--(1) In general. Under section 4251(d), the 
section 4251(a) tax is imposed on the transfer of a PTC by a carrier to 
a transferee. The person liable for the tax is the transferee. Except 
as provided in paragraph (d)(2) of this section, the person responsible 
for collecting the tax is the carrier transferring the PTC to the 
transferee. If a holder purchases a PTC from a transferee reseller, the 
amount the holder pays for the PTC is not treated as an amount paid for 
communications services and thus tax is not imposed on that payment.
    (2) Effect of statement that purchaser is a carrier--(i) On 
transferor. A carrier that transfers a PTC to a purchaser is not 
responsible for collecting the tax if, at the time of transfer, the 
transferor carrier has received written notification from the purchaser 
that the purchaser is a carrier, and the transferor has no reason to 
believe otherwise. The notification to be provided by the purchaser is 
a statement, signed under penalties of perjury by a person with 
authority to bind the purchaser, that the purchaser is a carrier (as 
defined in paragraph (b) of this section). The statement is not 
required to take any particular form.
    (ii) On purchaser. If a purchaser that is not a carrier provides 
the notification described in paragraph (d)(2)(i) of this section to 
the carrier that transfers a PTC, the purchaser remains liable for the 
tax imposed on the transfer of the PTC.
    (3) Exemptions. Any exemptions available under section 4253 apply 
to the transfer of a PTC from a carrier to a holder. Section 4253 does 
not apply to the transfer of a PTC from a carrier to a transferee 
reseller.
    (e) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. Unit card; sold to individual. (i) On February 1, 
2000, A, a carrier, sells a prepaid telephone card at A's retail 
store to P, an individual, for P's use in making telephone calls. A 
provides P with a PIN. The face of the card is marked ``400 
minutes.'' The sales price is $100. A tariff has not been filed for 
the units on the card. The toll telephone service acquired by 
purchasing the card will be obtained by entering the PIN and the 
telephone number to be called.
    (ii) Because P purchased from a carrier other than for resale, P 
is a holder. The card provides its holder, P, with a fixed amount of 
communications services (400 minutes of toll telephone service) to 
be obtained by means of a PIN, for which P pays in advance of 
obtaining service; therefore, the card is a PTC. Because the value 
of the PTC is not designated in dollars and a tariff has not been 
filed for the units on the PTC, the PTC is an untariffed unit card. 
Because it is transferred by the carrier to the holder, the face 
amount is the sales price ($100).
    (iii) The card is a PTC; thus, under section 4251(d), the face 
amount is treated as an amount paid for communications services and 
that amount is treated as paid when the PTC is transferred from A to 
P. Accordingly, at the time of transfer, P is liable for the 3 
percent tax imposed by section 4251(a). The tax is $3 (3% x $100 
(the face amount of the PTC)). Thus, the total paid by P is $103, 
the $100 sales price plus $3 tax. A is responsible for collecting 
the tax from P.
    Example 2. Unit card; given to individual. (i) The facts are the 
same as in Example 1, except that instead of selling a card, A gives 
a 40 minute card to P.
    (ii) Although the card provides P with a fixed amount of 
communications services (40 minutes of toll telephone service) to be 
obtained by means of a PIN, P does not pay for the service. 
Therefore, the card is not a PTC, even though it is called a 
``prepaid telephone card'' by A.
    (iii) Because the card is not a PTC, section 4251(d) does not 
apply. Furthermore, no tax is imposed by section 4251(a) because no 
amount is paid for the communications services.
    Example 3. Unit card; adding value. (i) After using the card 
described in Example 2, P arranges with A by telephone to have 400 
minutes of toll telephone service added to the card. The sales price 
is $100. P is told to continue using the PIN provided with the card.
    (ii) Because P purchased from a carrier other than for resale, P 
is a holder. The arrangement provides its holder, P, with a fixed 
amount of communications services (400 minutes of toll telephone 
service) to be obtained by means of a PIN, for which P pays in 
advance of obtaining service; therefore, the arrangement is a PTC. 
Because the value of the PTC is not designated in dollars and a 
tariff has not been filed for the units on the PTC, the PTC is an 
untariffed unit card. Because it is transferred by the carrier to 
the holder, the face amount is the sales price ($100).
    (iii) The arrangement is a PTC; thus, under section 4251(d), the 
face amount is treated as an amount paid for communications services 
and that amount is treated as paid when the PTC is transferred from 
A to P. Accordingly, at the time of transfer, P is liable for the 3 
percent tax imposed by section 4251(a). The tax is $3 (3%  x  $100 
(the face amount of the PTC)). Thus, the total paid by P is $103, 
the $100 sales price plus $3 tax. A is responsible for collecting 
the tax from P.
    Example 4. Dollar card; sold other than for resale. (i) On 
February 1, 2000, B, a carrier, sells 100,000 prepaid telephone 
cards to Q, an auto dealer. Q will give away a card to each person 
that visits Q's dealership. B provides Q with a PIN for each card. 
The face of each card is marked ``$2.'' The sales price for the 
100,000 cards is $50,000. The toll telephone service acquired by 
purchasing the card will be obtained by entering the PIN and the 
telephone number to be called.
    (ii) Because Q purchased from a carrier other than for resale, Q 
is a holder. Each card provides its holder, Q, with a fixed amount 
of communications services ($2 of toll telephone service) to be 
obtained by means of a PIN, for which Q pays in advance of obtaining 
service; therefore, each card is a PTC even though Q's visitors do 
not pay for the cards. The value of each PTC is designated in 
dollars; therefore, each PTC is a dollar card. Because the PTC is a 
dollar card, the face amount is the designated dollar value ($2).
    (iii) The cards are PTCs; thus, under section 4251(d), the face 
amount is treated as an amount paid for communications services and 
that amount is treated as paid when the PTCs are transferred from B 
to Q. Accordingly, at the time of transfer, Q is liable for the 3 
percent tax imposed by section 4251(a). The amount of the tax is 
computed as follows: 3%  x  $2 (the face amount of the PTC) = $0.06 
per PTC  x  100,000 PTCs = $6,000 tax. Thus, the total paid by Q is 
$56,000, the $50,000 sales price plus $6,000 tax. B is responsible 
for collecting the tax from Q.
    Example 5. Unit card; sold to transferee reseller. (i) On 
February 1, 2000, C, a carrier, sells 10,000 prepaid telephone cards 
to R, a convenience store owner. R will sell the cards to 
individuals for their own use. C provides R with a PIN for each 
card. The face of each card is marked ``400 minutes.'' A tariff has 
not been filed for the units on the card. C's sales price to R is 
$40,000 to be paid at the time of sale, plus a contingent amount 
equal to $0.14 for each minute of service used within 12 months to 
be paid at the end of the 12-month period. C also sells the 
identical card at its retail store for $110 to customers purchasing 
one card, or for $90 each to customers purchasing five or more 
cards. The toll telephone service acquired by purchasing the card 
will be obtained by entering the PIN and the telephone number to be 
called.
    (ii) Because R purchased from a carrier for resale, R is a 
transferee reseller. Because R's customers will purchase other than 
for resale they will be holders. Each card sold by R provides its 
holder, R's customer, with a fixed amount of communications services 
(400 minutes of toll telephone service) to be obtained by means of a 
PIN, for which R's customer pays in advance of obtaining service; 
therefore, each card is a PTC. Because the value of each PTC is not 
designated in dollars and a tariff has not been filed for the units 
on the PTC, each PTC is an untariffed unit card.
    (iii) The PTCs are untariffed unit cards transferred by the 
carrier to a transferee reseller. Thus, the face amount is 
determined under paragraph (c)(3)(ii) of this section, which permits 
C to choose from three alternative methods. Under paragraph 
(c)(3)(ii)(A)(1) of this section, the face amount of each PTC would 
be $110, the highest amount for which C sells to customers 
purchasing a single PTC. Alternatively, under paragraph 
(c)(3)(ii)(A)(2) of this section, a face amount of $99 per PTC may 
be used.

[[Page 69589]]

This face amount is computed as follows: 165%  x  $600,000 (the 
$40,000 sum certain plus the $560,000 contingent amount (10,000 PTCs 
 x  400 units = 4,000,000 units  x  $0.14 per unit)) = 
$990,00010,000 (the total number of PTCs sold). Finally, 
under paragraph (c)(3)(ii)(A)(3) of this section (assuming the PTCs 
are of a type that ordinarily is used entirely for domestic 
communications services), a face amount of $120 ($0.30 per unit x 
400 units) may be used.
    (iv) The cards are PTCs; thus, under section 4251(d), the face 
amount is treated as an amount paid for communications services and 
that amount is treated as paid when the PTCs are transferred from C 
to R. Accordingly, at the time of transfer, R is liable for the 3 
percent tax imposed by section 4251(a). The amount of the tax is 
computed as follows (assuming that C chooses to determine the face 
amount as provided in paragraph (c)(3)(ii)(A)(2) of this section): 
3%  x  $99 (the face amount of the PTC) = $2.97 per PTC  x  10,000 
PTCs = $29,700 tax. Thus, the total paid by R at the time of 
transfer is $69,700, the $40,000 sum certain plus $29,700 tax. C is 
responsible for collecting the tax from R.
    (v) In 2000 and 2001, R sells PTCs to its customers for varying 
amounts. Because any amount paid for a PTC purchased from a 
transferee reseller is not an amount paid for communications 
services, no tax is imposed on R's sale of a PTC.
    (vi) On February 15, 2001, C informs R that 3,000,000 minutes 
were used during the 12-month period. R pays C $420,000 ($0.14  x  
3,000,000), the contingent amount agreed to when R purchased the 
PTCs. No tax is imposed on this payment. Tax was imposed when the 
PTCs were transferred to R. The contingent amount paid in 2001, 
based on the number of minutes used, does not change R's tax 
liability.
    Example 6. Tariffed unit card; sold to transferee reseller. (i) 
On February 1, 2000, D, a carrier, sells 1,000 prepaid telephone 
cards to S, a convenience store owner, for $25,000. The value of the 
cards is not denominated in dollars, but the face of the card is 
marked ``100 minutes'' and a tariff of $0.33 per minute has been 
filed for the units on the card. S agrees that it will sell the 
cards to individuals for their own use and at a price that does not 
exceed $0.33 per minute. S actually sells the cards for $30 each 
(i.e., at a price of $0.30 per minute). D provides S with a PIN for 
each card. The toll telephone service acquired by purchasing the 
card will be obtained by entering the PIN and the telephone number 
to be called.
    (ii) Because S purchased from a carrier for resale, S is a 
transferee reseller. Because S's customers will purchase other than 
for resale they will be holders. Each card sold by S provides its 
holder, S's customer, with a fixed amount of communications services 
(100 minutes of toll telephone service) to be obtained by means of a 
PIN, for which S's customer pays in advance of obtaining service; 
therefore each card is a PTC. Because the value of each PTC is not 
designated in dollars and D sells the PTCs to S subject to an 
arrangement under which the price at which the PTCs are sold to 
holders will not exceed the designated number of units on the PTC 
multiplied by D's tariffed price per unit, each PTC is an tariffed 
unit card. Because the PTCs are tariffed unit cards, the face amount 
of each PTC is $33, the designated number of units on the PTC 
multiplied by the tariffed price per unit (100  x  $0.33 = $33), 
even though the actual retail sale price of the cards is $30.
    (iii) The cards are PTCs; thus, under section 4251(d), the face 
amount is treated as an amount paid for communications services and 
that amount is treated as paid when the PTC is transferred from D to 
S. Accordingly, at the time of transfer, S is liable for the 3 
percent tax imposed by section 4251(a). The tax is $990 (3%  x  
$33,000 (1,000 PTCs multiplied by the $33 face amount of each PTC)). 
Thus, the total paid by S is $25,990, the $25,000 sales price plus 
$990 tax. D is responsible for collecting the tax from S.
    Example 7. Transfer of card that is not a PTC. (i) On February 
1, 2000, E, a carrier, provides a telephone card to T, an 
individual, for T's use in making telephone calls. E provides T with 
a PIN. The card provides access to an unlimited amount of 
communications services. E charges T $0.25 per minute of service, 
and bills T monthly for services used. The communications services 
acquired by using the card will be obtained by entering the PIN and 
the telephone number to be called.
    (ii) Although the communications services will be obtained by 
means of a PIN, T does not receive a fixed amount of communications 
services. Also, T cannot pay in advance since the amount of T's 
payment obligation depends upon the number of minutes used. 
Therefore, the card is not a PTC.
    (iii) Because the card is not a PTC, section 4251(d) does not 
apply. However, the tax imposed by section 4251(a) applies to the 
amounts paid by T to E for communications services. Accordingly, at 
the time an amount is paid for communications services, T is liable 
for tax. E is responsible for collecting the tax from T.

    (f) Effective date. This section is applicable with respect to 
PTCs transferred by a carrier on or after the first day of the first 
calendar quarter beginning after the date of publication of the 
final regulations in the Federal Register.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-33346 Filed 12-16-98; 8:45 am]
BILLING CODE 4830-01-U