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Consumer News Release

For immediate release - Tuesday, October 4, 2005.
Contact Bill Roach - 515-281-5536.

MCI WorldCom to Pay Iowa $2.7 Million in Tax Claims

DES MOINES. Attorney General Tom Miller today announced that MCI-WorldCom has agreed to pay the State of Iowa $2.7 million to settle Iowa's claim that MCI engaged in a scheme to avoid payment of state taxes in 2000 and 2001.

Miller 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 Iowa, to states where the income would not be subject to tax. Over a four-year period from 1999 to 2002, MCI charged its subsidiaries approximately $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.

This scheme decreased MCI-WorldCom's reported Iowa tax liabilities for the tax years 2000 and 2001.

Miller said that MCI's 2002 bankruptcy was the largest bankruptcy in U.S. history. Recognizing the potential impact of the scheme on state tax claims, Iowa joined with fifteen other states to audit MCI's records.

Miller said the audit marked the first time that state taxing authorities joined together in a bankruptcy case to investigate an income tax evasion scheme. The states' negotiations with MCI resulted in MCI's agreement to pay $315 million in total to the sixteen states. Another $16 million was paid to the state of North Carolina in a separate agreement.

Iowa's $2.7 million share of the settlement represents 78% of Iowa tax and interest claims against the company for the years 2000 and 2001. "This is a good result for Iowa taxpayers," Miller said, "since the money will be paid to the state treasury immediately and we may not have been able to collect this much even after a trial."

In addition to paying Iowa $2.7 million Miller said MCI will discontinue the use of any similar royalty program.

The states involved in the settlement are: Alabama, Arkansas, Connecticut, District of Columbia, Florida, Georgia, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Missouri, New Jersey, Ohio, Pennsylvania and Wisconsin. Miller's office worked closely with the Iowa Department of Revenue to resolve the case.

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