Kathleen G. Kane - Pennsylvania Office of Attorney General - Protecting Pennsylvanians

October 3, 2005

Attorney General Corbett announces MCI-WorldCom to pay PA $46.5 million to settle fraudulent tax scheme

HARRISBURG -- Attorney General Tom Corbett today announced that MCI-WorldCom has agreed to pay the Commonwealth $46.5 million to settle Pennsylvania's claim that MCI engaged in a sham royalty scheme to avoid payment of Pennsylvania taxes from 1999 to 2002. 

Corbett said the scheme, devised for MCI by accounting firm KPMG, was designed to shift income that MCI received from its subsidiaries in various states, including Pennsylvania, to states where the income would not be subject to tax.  Over a four-year period, MCI charged its subsidiaries over $20 billion in royalty fees.  The subsidiaries deducted the royalty fees from state taxes as business expenses, greatly reducing their tax liability in those states.  The royalty income was then reported by MCI in states where the income was not taxable.

Corbett said in 2002 MCI filed for bankruptcy, which was the largest bankruptcy in U.S. history.  Recognizing the potential impact of the royalty scheme on state tax claims, Pennsylvania joined with fifteen other states to audit MCI's records. 

Corbett said the audit marked the first time that state taxing authorities joined together in a bankruptcy case to investigate tax fraud.  The Pennsylvania Attorney General's Office assumed a lead role in negotiations with MCI, which resulted in MCI's agreement to pay $315 million in total to the sixteen states that are party to the settlement.   

In addition to paying Pennsylvania $46.5 million, Corbett said, MCI will waive any pre-bankruptcy refund claims and discontinue the current or future use of any similar royalty program.  He said ongoing negotiations over MCI's non-royalty tax liabilities to Pennsylvania are expected to result in still more payments.

Corbett thanked, Senior Deputy Attorney General Christopher R. Momjian and Chief Deputy Attorney General Stephen L. Brandwene of the Attorney General's Financial Enforcement Section for their work on the case.  He also thanked the Pennsylvania Department of Revenue for their assistance.