Companies That Inflated Earnings Seek Tax Refunds

By: Marcy Gordon

Some of the big companies caught up in accounting scandals are now asking the government to refund some of their federal taxes, saying they overpaid based on the artificially inflated profits they reported.

WorldCom, Enron, Qwest Communications, and HealthSouth are either pursuing or considering filing for federal tax refunds or credits for payments made on billions of dollars falsely claimed as earnings, a Senate Finance Committee aide said yesterday, confirming a report in the Wall Street Journal. The aide spoke on condition of anonymity.

The four companies - all under investigation by federal authorities - were among the biggest corporate scandals that came to light over the past year and a half.

The Senate Finance Committee chairman said yesterday he is asking federal prosecutors to move against companies seeking tax refunds because their overpayments were based on artificially inflated profits they reported. Sen. Charles Grassley, R-IA, said he will "encourage (the Justice Department) to take aggressive action against the companies and individuals who were in on the con".

Action could include levying criminal fines, which Grassley said may have to be increased to cover the full amounts of refunds falsely claimed by companies.

Telecommunications company WorldCom, which is seeking to emerge from bankruptcy protection and officially change its name to MCI in the fall, already has collected $300 million in tax refunds from the Internal Revenue Service. Mississippi-based WorldCom filed the largest corporate bankruptcy in U.S. history last summer after disclosing what appeared to be the biggest accounting fraud ever, nearly $11 billion.

A spokesman for WorldCom would not comment on the tax refund issue. IRS spokeswoman Nancy Mathis said the agency would have no comment.

The companies are "bad actors (that) made the IRS an unwitting accomplice to their fraud", Grassley said in a statement.

The government also is to blame "for allowing these practices to go on", said Pete Sepp, a spokesman for the National Taxpayers Union, noting that the government benefited from the extra tax revenue paid by the companies on their bogus earnings. "The big enabler in this is the tax code."

HealthSouth, which has not decided whether to seek a refund, said it overpaid $300 million in federal taxes because of inflated income. "Logically, if we overpaid taxes on income we didn't have, we may seek a refund", HealthSouth spokesman Andy Brimmer told the Journal.

Now-bankrupt Enron, which paid only $63 million in taxes between 1996 and 2001, is seeking tax credits, while Qwest is believed likely to seek a refund.

"We are not commenting other than to confirm we are in discussions with the IRS", Enron spokeswoman Karen Denne said. "I'm not going to comment on the content of those discussions."

Qwest spokesman Chris Hardman said: "The company is currently in the process of restating its financials and has not yet determined what the impact would be regarding a potential credit." He declined to elaborate and said he did not know how much Qwest had paid in taxes.

Chicago-based tax attorney Richard Lipton said corporate fraud should have no effect on the ability of companies to recoup tax overpayments. "It's not the government's money, it's the shareholders' money", he said.

In fact, a HealthSouth shareholders' lawsuit filed last month in Birmingham, AL, wants any IRS refunds to the company to go to shareholders.