MCI to pay $100 mil for predecessor's back taxes
By Shelia Byrd, Associated Press
The Arizona Republic
Tuesday, May 10, 2005 

JACKSON, Miss. - MCI Inc. will pay $100 million in cash to cover back taxes that its predecessor WorldCom Inc. owed Mississippi, state Attorney General Jim Hood announced Monday.

WorldCom collapsed in 2002 amid revelations of an $11 billion accounting fraud to inflate earnings and hide expenses.

WorldCom, which got its start in Mississippi, was once headquartered in Jackson and later moved to nearby Clinton.  WorldCom emerged from bankruptcy protection as MCI, which is based in Ashburn, Va., and recently accepted an $8.54 billion buyout offer from Verizon Communications Inc.

MCI shares fell 2 cents to close at $25.79 on the Nasdaq Stock Market.

Verizon has offered $26 a share in cash and stock for MCI.

Hood said MCI did not admit any wrongdoing.  MCI is also voluntarily making a $4.2 million donation to Children's Justice Center of Mississippi to benefit abuse victims and will make a payment of $14 million for Mississippi's attorneys' fees and costs, he said.

"This agreement benefits MCI and the state of Mississippi, allowing us to put this issue behind us in a fair and equitable manner," Carol Ann Petren, MCI deputy general counsel, said in a statement that was e-mailed to the Associated Press.

The telecommunications company also will turn over WorldCom's former headquarters building in downtown Jackson to the state, Hood said.  The building has not been appraised, he said.

Hood said the headquarters would be a symbol of the millions of dollars lost by state investors.

"They needed to leave a symbolic marker here for the people to see what had happened to people's retirement savings," Hood said.

Hood said the $100 million will cover some of the $1 billion in back taxes, including corporate income taxes, owed to the state for the period 1998 to 2002.

In March, former WorldCom Chief Executive Officer Bernard Ebbers was convicted on charges of fraud, conspiracy and false regulatory filings in the WorldCom accounting scandal.  Ebbers' sentencing is set for June 13.

Hood said the settlement was filed Monday in U.S. Bankruptcy Court in New York.  He expects court approval later this week.

Mississippi's claim for unpaid taxes, interest and penalties arose from an alleged complex tax shelter that the former WorldCom devised to avoid paying income taxes by characterizing management fees as royalties, rather than income or service fees, Hood said.

Under the settlement, outstanding state tax claims against MCI related to the royalty program are dismissed, the company said.

Hood said at least 18 other states have also sued the company over the royalty program, through which WorldCom allegedly licensed intangible assets - mainly "management foresight" - to its units in exchange for royalty payments totaling about $19 billion.

"It was nothing but a tax evasion scheme," Hood said.

"I've yet to find an accountant who's ever heard of this term 'management foresight' where it was worth a $1 billion in taxes."

Hood said the state is seeking $900 million from KPMG LLP, an accounting firm that he alleged helped WorldCom come up with the scheme.  KPMG replaced auditing firm Arthur Andersen LLP as WorldCom's auditor shortly before WorldCom collapsed.

KPMG said Monday that it provided sound and appropriate tax advice as part of the company's restructuring in the late 1990s.

"MCI/WorldCom was ultimately responsible for deciding whether, and how, to implement that advice," spokesman George Ledwith said in a statement