Magazine article The American Prospect

Obscene Phone Call

Magazine article The American Prospect

Obscene Phone Call

Article excerpt

I got a call from MC I the other night. It came just as I was finishing up a paper attacking a multibillion-dollar tax loophole that MCI is trying to create for itself. Having already been surprised at being contacted by AT&T and Verizon on the issue that same day, I wondered how MCI had found out, too. But my paranoia was unjustified. MCI's call was merely an attempt to persuade me to change my long-distance service.

As has been well reported, MCI, aka WorldCom, was driven into bankruptcy due to the largest accounting fraud in American history, which has cost the company's shareholders and creditors hundreds of billions of dollars. Now MCI is trying to milk the public even further, by perverting the purpose of a federal tax law that lets companies coming out of bankruptcy postpone certain taxes. MCI wants to turn that postponement into a permanent tax exemption.

I was tipped off to MCI's attempted tax rip-off a few months ago by my friends at the Communications Workers of America, which lost tens of thousands of jobs at AT&T and elsewhere due to MCI's long-distance price war. MCI's competitors couldn't afford to compete at MCI's low prices and, as it turns out, neither could MCI--except by cooking its books.

So what's MCI up to now? In its bankruptcy proceeding, MCI will shed tens of billions of dollars in debt--"upwards of $19 billion or more," according to one of its (redundantly stated) bankruptcy filings, or as much as $27 billion, according to another filing. That's good news for MCI (and bad news for its creditors), but there's a fly in the ointment: Debt cancellation normally generates taxable income for the borrower, meaning a potential federal tax bill for MCI of as much as $9.5 billion at the 35 percent corporate tax rate.

The rule making debt cancellation taxable goes back to the early days of the income tax, and when you think about it, it's not just logical, it's essential. Otherwise, for example, workers could just be paid in loans that are quickly forgiven, tax free. In fact, it's hard to think of any kind of income--wages, sales, dividends, interest, capital gains, rents or whatever--that couldn't easily be converted into a loan. So without a usual tax on debt forgiveness, the income tax would collapse.

The tax code does give a break to companies coming out of bankruptcy. To make it easier for them to get a fresh start, reorganized companies don't have to pay tax immediately on their washed-out debt. …

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