dslreports logo
site
spacer

spacer
 
   
spc
story category
Verizon's Favorite Tax-Dodging Tactic May Soon Be Illegal
Federal jobs bill could put Verizon Frontier sale at risk...
by Karl Bode 08:32AM Monday Mar 29 2010
As we discussed last week, Verizon's taking increasing heat of its use of sophisticated financial tricks that allow the carrier to unload unwanted assets and debt without having to pay taxes. The problem has traditionally been that this financial maneuver (known as a Reverse Morris Trust) has resulted in bankruptcies for the companies either being spun off or used as acquisition partners, and a lot of headaches for broadband consumers. As Verizon now attempts to sell 6 million DSL users across 14 states to Frontier using the same method, they've found their favorite tax trick has been made illegal under a House version of a new federal jobs bill:
quote:
A provision in a federal jobs bill that outlaws a tax loophole used in Verizon's bid to sell its telephone landlines to Frontier Communications Corp. in West Virginia and 13 other states could derail the sale. On Wednesday, the U.S. House passed legislation that includes a ban on a tax shelter -- known as a Reverse Morris Trust -- that Verizon and other companies have used to spin off operations tax-free. Verizon plans to use the Reverse Morris Trust as part of its $8.6 billion deal with Frontier.
You shouldn't be surprised if the ban on Reverse Morris Trusts "magically" disappears as the law winds its way through the legislative process. It has been a very popular financial tactic to avoid taxation, used by Kraft, Viacom, Disney and other companies. The Reverse Morris Trust, made legal since 1997, would prevent Verizon from paying any taxes on the $8.5 billion Frontier deal. Given Verizon's "makeover" (selling off all rural DSL and landline markets) has involved tens of thousands of terminated employees -- unions have been lobbying hard to have the Reverse Morris Trust eliminated from the Verizon accounting arsenal.

As the link above illustrates, Verizon hasn't specifically made many friends in West Virginia -- given that they've neglected the state's aging copper infrastructure for years to focus their attentions elsewhere. Unions in the state have also been complaining for most of the decade that they haven't been given the necessary resources to do their jobs. As a result, regulators have stated that consumer complaints in the state have skyrocketed over the last few years.

view:
topics flat nest 

Rob
In Deo speramus.
Premium
join:2001-08-25
Kendall, FL
kudos:2

Queue the lobbyists

Some empty promises here and there and Verizon should be back on track in no time.

Camaro
Question everything
Premium
join:2008-04-05
Westfield, MA
kudos:1

Re: Queue the lobbyists

Agree, they will slide right in to there offices with shit eating grins and money and tell the people in charge that this is good for the consumer trust us.

spewak
R.I.P Dadkins
Premium
join:2001-08-07
Elk Grove, CA
kudos:1
Reviews:
·SureWest Internet
said by Rob:

Some empty promises here and there and Verizon should be back on track in no time.
Agreed! Verizon will tell Congress that if the tax loophole is eliminated, then the halls of Congress will not be wired for FIOS and the Franchise agreement will be null and void.
--
The weekend is here, grab a can of beer!
gorehound

join:2009-06-19
Portland, ME
The Reverse Morris Trust, made legal since 1997 should be illegal and never should have been made legal in the first place.
All it does is screw us the consumer.And it screws the goverment from getting the taxes it should get.

Sabre
Di relung hatiku bernyanyi bidadari

join:2005-05-17

US, not WV

According to the article, the provision banning it was actually attached to a federal law, not a state law. It was not anything specifically passed in Charleston, but this link concentrates on the impact in WV since it's a WV paper.

Karl Bode
News Guy
join:2000-03-02
kudos:39

Re: US, not WV

Whoops, corrected -- thanks!

Sabre
Di relung hatiku bernyanyi bidadari

join:2005-05-17

Re: US, not WV

No problem. Thanks for all the hard work!

pnh102
Reptiles Are Cuddly And Pretty
Premium
join:2002-05-02
Mount Airy, MD

Probably Not Going to Help

If these rural markets are not profitable for Verizon, then there's still nothing stopping them from selling them off anyway.
--
"Net Neutrality" zealots - the people you can thank for your capped Internet service.

tshirt
Premium,MVM
join:2004-07-11
Snohomish, WA
kudos:5
Reviews:
·Comcast

1 recommendation

Re: Probably Not Going to Help

said by pnh102:

If these rural markets are not profitable for Verizon, then there's still nothing stopping them from selling them off anyway.

No, there is not, but it would be less tempting/expensive to do, without the tax break, provided by the RMT.

The intent of the RMT was to allow Corp. to spin off SUCCESSFUL divsions into seperate businesses, IF they no longer matched the Corp.s core business, without excess tax liability for either the parent, shareholders, or the new business. A valuable tool for de-consolidating businesses before they became "too large to fail".
However, it didn't have the safegaurds to prevent it from being used to dump unwanted assets and DEBT onto the discarded portions, benefiting ONLY the parent.
Don't know if it should be illegal, but the conditions should be HIGHLY regulated against these abuses.

pnh102
Reptiles Are Cuddly And Pretty
Premium
join:2002-05-02
Mount Airy, MD

1 edit

Re: Probably Not Going to Help

said by tshirt:

The intent of the RMT was to allow Corp. to spin off SUCCESSFUL divsions into seperate businesses ...
You could make the argument that these divisions were successful. If they were failures, in terms of not making a profit, Verizon would have pulled the plug on them on their own, with or without selling them off.

The problem in Verizon's eyes were that these areas were profitable, but not profitable enough. In all the cases, you can easily note the mistakes that were made by the companies that bought these assets. They quickly turned something that was moderately profitable into a loser.
--
"Net Neutrality" zealots - the people you can thank for your capped Internet service.

tshirt
Premium,MVM
join:2004-07-11
Snohomish, WA
kudos:5
Reviews:
·Comcast

Re: Probably Not Going to Help

But they are exactly verizons core business.
The part that's wrong, is them loading debt on the new business entity, while taking the tax advantage for themselves, The RMT idea was a clean cut, equal assets and debt spun into the new business and the shareholders/parent recieved stock in return, so no tax liability as no value changed hands.
This case is a defacto sale and should be taxed as such (in which case, verzion would probably not proceed)
(not that the proposed law will effect this sale)

FFH
Premium
join:2002-03-03
Tavistock NJ
kudos:5

1 recommendation

Re: Probably Not Going to Help

said by tshirt:

(not that the proposed law will effect this sale)
I think that will be the case. The Verizon deal is grandfathered in under the new law.
»Verizon transaction exempt from law
--
NCAA® March Madness on Demand®
tmc8080

join:2004-04-24
Brooklyn, NY
Reviews:
·ooma
·Optimum Online
·Verizon FiOS

Handwriting on the wall..

No doubt they'll get one last shot at jettisoning the last northeast unprofitables.. but will have the door slammed firmly shut on selling any significant portion of their rural midwest and west coast assets which folded GTE and PacBell into what is now Verizon wired & wireless services. Then Verizon will have to do battle with its remaining footprint for upgrading to fiber and/or lte on an accelerated time scale. Verizon will have to choose which one is cheapest to install.. and we all know that answer: LTE, nearly as cheap as AT&T's deployment of DSL.
unoriginal
Premium
join:2000-07-12
San Diego, CA

Re: Handwriting on the wall..

Pacbell isn't part of Verizon. We here in California are part of Ma Bell aka AT&T.
tmc8080

join:2004-04-24
Brooklyn, NY
Reviews:
·ooma
·Optimum Online
·Verizon FiOS

Re: Handwriting on the wall..

said by unoriginal:

Pacbell isn't part of Verizon. We here in California are part of Ma Bell aka AT&T.
When Verizon became the premier telco long before AT&T got self made with BellSouth they acquired GTE so they are part of the landscape of California telco. If you look carefully at the deal assets had to switched back & forth so that the deal could pass anti-trust. No doubt some CA municipalities got switched around and some former PacBell assets wound up in Verizon hands too as part of the deal and some GTE assets went to Pacbell. What happened after is irrelevant.. to how Verizon.. a former northeast telco wound up with West Coast telecom wireline assets in the last mile.

Bill Neilson
Premium
join:2009-07-08
Arlington, VA

I would not be that surprised if it stayed in, Karl

though most of the time I would agree, I think the need for any sort of financial help to this country revenue wise may for the first time in a LONG TIME outweigh Verizon throwing around their weight in DC

With that said, I am probably wrong and under-estimating how utterly corrupt the government can be
XEvilWyvernX
Premium
join:2004-10-28
Parkersburg, WV

:-)

I hope frontier dies a horrible death and goes bankrupt just not at everyones else expense lol. Talk about poor service from verizon they couldnt even manage to provide a reliable 768K dsl to my house and thats being in one of the larger cities in wv in not in a riral area but I can get 20mb on cable go figure

FFH
Premium
join:2002-03-03
Tavistock NJ
kudos:5

1 edit

Verizon transaction exempt from law

Before everyone gets real excited about this affecting the current Verizon spin off to Frontier, there is a provision in the law that exempts any transaction that was agreed to in a contract BEFORE Mar 15, 2010. I guess it will be up to the lawyers on whether Verizon & Frontier already have a binding agreement.

Go to page 43 of the PDF report on the law
»frwebgate.access.gpo.gov/cgi-bin···.111.pdf
The provision applies to exchanges occurring after the date of enactment.

However, the provision does not apply to any exchange in connection
with a transaction which is (i) made pursuant to an agreement
which was binding on March 15, 2010, and at all times thereafter
,
(ii) described in a ruling request submitted to the Internal Revenue
Service on or before such date, or (iii) described on or before such date in a public announcement or in a filing with the Securities
and Exchange Commission.
The actual bill. See Sec 302 for who is exempted from the law because of effective date:
»thomas.loc.gov/cgi-bin/cpquery/?···C_34052&
(c) Effective Date-

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply to exchanges after the date of the enactment of this Act.

(2) TRANSITION RULE- The amendments made by this section shall not apply to any exchange pursuant to a transaction which is--

(A) made pursuant to an agreement which was binding on March 15, 2010, and at all times thereafter,

(B) described in a ruling request submitted to the Internal Revenue Service on or before such date, or

(C) described on or before such date in a public announcement
or in a filing with the Securities and Exchange Commission.
Looks to me like Verizon already has their loophole in the bill already.
--
NCAA® March Madness on Demand®

Gbcue
Premium
join:2001-09-30
Santa Rosa, CA
kudos:8
Reviews:
·AT&T U-Verse

Isn't this what Enron Did?

Isn't this what Enron Did? Spun off their debt to shell companies (read: Frontier) to make the parent company (Verizon) look like it had record profits? Or am I confusing it with a different company?
--
My Blog 2.0

markofmayhem
Why not now?
Premium
join:2004-04-08
Pittsburgh, PA
kudos:5

Re: Isn't this what Enron Did?

No, Frontier isn't a subsidiary of Verizon. This isn't like Enron.

heya

@fpdomain.com
Enron's problems (which are miniscule compared to some of the FannieMae/FreddieMac shenanigans of more recent history!) were off balance sheet -- Sarbanes-Oxley was billed as the 'fix' to that.
XEvilWyvernX
Premium
join:2004-10-28
Parkersburg, WV

1 edit

hmm

The WV State Public Service Commission will most likely reject the Frontier Sale in wv. Unless they wanna relive a reenactment of "Matewan"
Most states fight with lawyers. We use Shotguns LOL

Yee Haw

@sbcglobal.net

Reverse Morris Trust illegal?

Well, I suppose it is OK to outlaw the RMT as long as the Reverse Cowgirl still is OK.
russotto

join:2000-10-05
West Orange, NJ

Icing on the cake

The problem with these deals at heart isn't the tax treatment. It's that essentially, what Verizon seems to be doing is offloading its debts onto a company that then fails, leaving the creditors (who presumably lent the money based on Verizon's debt rating, not that of the other company) high and dry.

The fact that they get favorable tax treatment is as the subject says, icing on the cake.

Snowy
Premium
join:2003-04-05
Kailua, HI
kudos:6
Reviews:
·Clearwire Wireless
·Time Warner Cable

Special interest group vs Special interest group

"Given Verizon's "makeover" (selling off all rural DSL and landline markets) has involved tens of thousands of terminated employees -- unions have been lobbying hard to have the Reverse Morris Trust eliminated from the Verizon accounting arsenal."

Hell, let's just rewrite the history books to reflect modern day America!
"and that government of the special interest group, by the special interest group, for the special interest group, shall not perish from the earth."

TechieZero
Tools Are Using Me
Premium
join:2002-01-25
Gibsonton, FL

See If Verizon India Cares...

If it's too much money here they are just going to move it there anyway.

batterup
I Can Not Tell A Lie.
Premium
join:2003-02-06
Netcong, NJ

Verizon to take $970M charge from health care bill

Corporations pay taxes; who do you think is going to pay for health care.

quote:
NEW YORK — The corporate tax impact of the recent health care overhaul grew Thursday as Verizon Communications Inc. announced it will record a related $970 million non-cash charge in the first quarter.