Nine States Want To Audit MCI For Unpaid Taxes

by Leroy Baker, Tax-News.com, New York

05 September 2003

The taxing authorities of at least nine US states are asking for more time to investigate whether MCI, currently under bankruptcy protection, has underpaid state income taxes.

The states, led by Massachusetts have filed a motion with the US bankruptcy court seeking more time to allow them to conduct a tax audit of the firm. The deadline for such action elapsed in January this year, but according to some reports, the states estimate they are out of pocket by as much as $800 million from a tax shelter used by MCI.

According to the motion, the states (which include New York, New Mexico, Pennsylvania, Virginia, North Carolina and Illinois) allege that the much troubled corporation created a subsidiary known as MCI WorldCom Brands, a limited liability firm based in Delaware "at least in part, for the purpose of avoiding or minimizing the payment of state income taxes."

The states' claim is based on evidence gathered by a group of bondholders in MCI who are objecting to the way the company is reorganizing itself. The bondholders say that MCI is diluting its value and assets in order to pay off WorldCom creditors.

It is the latest accusation in a long line of complaints about the former WorldCom's conduct after news emerged last week that the Oklahoma State Attorney General plans to file criminal charges against the company, its former chief executive Bernard Ebbers and five other individuals in connection with its $11 billion accounting fraud.

Although a number of states have been investigating MCI, this is the first state lawsuit against the company, which reached a $2.25bn settlement with the SEC after it filed charges in June 2002, alleging $11bn worth of accounting frauds.

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