Companies that inflated earnings now seeking tax refunds

WASHINGTON -- Some of the big companies caught up in accounting allegations have a simple request for the government: When they reported inflated profits, that made their taxes rise; now they want the tax money back.

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. All four companies are under investigation by federal authorities for accounting violations.

The Senate Finance Committee chairman said Friday 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-Iowa, 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.

Collected $300 million

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 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 refunds, 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 Wall Street Journal, which first reported the story Friday.

Eleven former HealthSouth executives have agreed to plead guilty in the weeks since the Securities and Exchange Commission filed a civil lawsuit in March accusing the company and founder Richard Scrushy of an accounting fraud that overstated profits by at least $2.5 billion since 1997.

The company, with nearly 1,700 facilities in all 50 states, calls itself the largest U.S. provider of diagnostic imaging, outpatient surgery and rehabilitation services.

Bankrupt Enron, which paid only $63 million in taxes between 1996 and 2001, is seeking tax credits. 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."

At 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 would not elaborate and said he did not know how much Qwest had paid in taxes.

A Chicago-based tax attorney 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," Richard Lipton, the tax attorney, told the Journal.

In fact, a HealthSouth shareholders' lawsuit filed last month in federal court in Birmingham, Ala., wants any amount the company is refunded by the IRS to go to shareholders.