Report Criticizes Tax Strategies Employed By WorldCom

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

28 January 2004

In his final report on the collapse of WorldCom (now known as MCI), US Bankruptcy Court investigator, Richard Thornburgh strongly criticises the strategies employed by the telecoms firm to reduce its tax liability.

According to a Wall Street Journal report on the matter, advised by consultancy firm KPMG, WorldCom treated the "foresight of top management" as an intangible asset in the same way as a patent or trademark might be treated. Also in the same way, the firm licensed this asset to its units, which then paid royalties to the parent company, and deducted the payments as normal business expenses on their state income tax returns.

Although Mr Thornburgh's report did not provide a definitive figure for the state taxes that may have been avoided, estimates have suggested that the amount could be anywhere between $100 million and $350 million. According to the Wall Street Journal, some fourteen states are preparing to file a claim against the firm if a settlement is not reached.

Although Mr Thornburgh suggested in his report that MCI would have grounds to sue its auditor (among others), the telecoms firm quickly announced that it had no intention of doing so.

In a statement responding to the allegation that the tax strategy still employed by MCI is "highly aggressive", KPMG dubbed the examiner's conclusions "simply wrong", explaining that similar strategies are commonly used by many other companies.

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