MCI to pay states $315 mln for tax claims–source

By Joan Gralla

NEW YORK (Reuters) – MCI, the former WorldCom, has
preliminarily agreed to pay 14 states and the District of
Columbia a total of $315 million to settle back tax claims, a
legal source familiar with the case said on Tuesday.

A spokesman for MCI, which the states said wrongly shielded
billions of dollars from state taxes by using a KPMG-devised
royalty tax plan, declined to comment.

The No. 2 U.S. long distance carrier in May settled the
first of the state back-tax claims by paying Mississippi, where
it was formerly headquartered, $100 million in cash and handing
over its $7 million office tower.

In the new settlement, which MCI’s board is expected to
approve soon, New Jersey will receive the biggest payment —
$51.5 million — according to the source, who requested
anonymity.

The next largest award, of $44.6 million, will go to
Pennsylvania, followed by Georgia at $38 million.

Massachusetts, which led the effort to collect the back
taxes, stands to get $33.2 million.

The settlement will cover the years 1999 to 2002.

MCI, which last year exited bankruptcy after the setting
the U.S. record for the biggest-ever filing, at first accused
the states of using “abusive” tactics to wring money from it.
But the telecommunications company later tried to settle the
states’ tax claims, and in January, it doubled its offer for
all the states except Mississippi to $300 million.

But talks dragged on because MCI also wanted the states to
promise not to pursue criminal prosecutions, the source said.
However, most states could not do that, as the tax claims were
handled by their revenue agencies, and only the states’
attorney generals can decide whether to prosecute, the source
said.

MCI finally backed down on its demand for immunity, the
source said, adding: “I think they recognize that was just too
cumbersome.”

MCI also wanted protection from any problems future audits
might uncover. “It’s tomorrow’s fight,” the source said,
explaining the settlement language on the subject of immunity
“is open to a lot of interpretations.”

The states charged that the KPMG royalty tax plan MCI used
let it charge its subsidiaries $24 billion for the “foresight
of top management.” This shielded the income from state taxes.
But the states said management’s expertise was not a royalty,
unlike trademarks, for example.

A spokesman for KPMG declined to comment on Tuesday.

Although MCI has said it will not seek money from its tax
adviser for any sums it pays the states, Mississippi said last
November it was considering filing criminal charges against
KPMG.

KPMG on Monday agreed to pay $456 million to the federal
government to settle a probe over a separate product, tax
shelters for wealthy individuals. The firm avoided a criminal
indictment, which might have crippled it.

Spokesmen for South Carolina, which last March filed a $17
million claim against MCI, and North Carolina, which also was
not included in the settlement, were not immediately available.

An alphabetical list of the remaining initial awards
follows:

Arkansas: $1.1 million.

Connecticut: $4.4 million.

District of Columbia: $955,000.

Florida: $31.7 million.

Iowa: $2.5 million.

Kentucky: $5.8 million.

Maryland: $25.7 million.

Michigan: $14.5 million.

Missouri: $23.5 million.

Ohio: $28.5 million.

Wisconsin: $6.5 million.