WorldCom could be caught between SEC, IRS rules

Published 5:00 am Monday, July 15, 2002

Again, not to try to defend the actions of WorldCom’smanagement, but an interesting comment was made by an accountantfriend regarding the $4 billion accounting scandal. It seems thatthe accounting rules the Internal Revenue Service uses and theSecurity and Exchange Commission (SEC) accounting rules WorldComare accused of breaking are not one in the same.

Under IRS rules, a company is not allowed to expense an itemuntil the item has been put in service. Expensing prior to puttinginto service allows the company to avoid taxes, something the IRSdoes not like companies to do.

WorldCom, on the other hand, is being accused of cooking theirbooks by some $4 billion because they tried to move operatingexpenses of excess capacity in their fiber optic lines, which werenot being used, to the future when the fiber optic lines would beput into service. Under IRS rules the accounting adjustments arepossibly correct. Under SEC guidelines the accounting adjustmentsare incorrect.

The rub on all of this, according to the accountant, is that byoverstating their revenue by the $4 billion, WorldCom conceivablycould have paid $1.5 to $2 billion in taxes to the IRS. That’s $1.5to $2 billion in taxes, which they may not owe!

The $2 billion question, according to the accountant, is whenWorldCom restates their earnings as promised. Will they also amendtheir tax returns and get a refund of the overpaid taxes?

Let’s see . . . Democrats tend to like taxes while Republicanslike to cut taxes. One has to wonder: How will this one will playin the politics of the scandal?