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

Posted on: Tuesday, 30 August 2005, 18:35 CDT

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.

Source: REUTERS

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