|
========================================== May 11th, 1998 Bruce Kushnick New Networks Institute To: Criminal Investigation Division Internal Revenue Service (IRS) To whom it may concern,
I am requesting an investigation into what may be improper or illegal write-offs of $21 billion dollars by the Regional Bell Operating Companies, (RBOCs) accounting for multiple billions of dollars per-company in underpaid tax payments. This issue may also effect other local phone companies, such as GTE. The original Bell Operating Companies are:
he RBOCs, also known as the "Baby Bells", are holding companies which control specific states' local Bell companies i.e., Ameritech controls a five-state region Illinois, Indiana, Michigan, Ohio, and Wisconsin. (Attached is a list of the states each holding company controls.) Also, in 1997, Bell Atlantic purchased NYNEX, while Southwestern Bell purchased Pacific Telesis, and changed its name to SBC Communications. The Details: Starting in the early 1990's, the Regional Bell Operating Companies applied for and received, state by state, changes in state regulation. Known commonly as "Alternate Regulations", these new laws replaced the normal, "rate-of return" regulation that is used by utilities that are monopolies. As you know, this former utility regulation controlled profits because the companies have a guaranteed income from their captured audience, the local telephone subscriber, and the companies enjoy a business with virtually no competition to lower prices. Alternate Regulations were granted to the Bells based on two basic assumptions Ñ promises of massive new technology deployment, as well as new competition from competitors. First and foremost, the companies were supposed to deploy new technologies and new telephone networks, replacing the older copper wiring, which has been the mainstay of telephone services for decades, with "fiber-optic" wiring. This new form of wire is able to deliver much larger quantities of information, and they were supposed to have 500 channels of everything from movies to home game shows, and all looking better than current cable services. Technology issues aside, this deployment has commonly been called the Fiber-Optic Information SuperHighway. Based on numerous sources, by 1997 more than 1/4 of America was supposed to be rewired, almost half of America by the year 2000. Bell Atlantic stated that they would be spending $11 billion dollars, while Pacific Telesis promised $16 billion dollars. Bell Atlantic Annual Report, 1993: "First, we announced our intention to lead the country Pacific Telesis 1994 Annual Report : "In November 1993, Pacific Bell announced a capital However, these new networks were never deployed. Attached is a specific case Ñ "The Case of Opportunity New Jersey". As discussed in the attached text, New Jersey Bell (Bell Atlantic) made more money by inflating prices, (and massive tax savings), but never delivered on the fiber-optic highway. According to filed documents by the New Jersey State Consumer Advocate, of the $1.5 billion dollars that was supposed to have been spent on network upgrades for residential subscribers in that state, only $79 million was used. Simultaneously, New Jersey Bell paid an additional $1 billion in added dividends to the holding company, Bell Atlantic. In New Jersey, there was also over $1 billion in network write-offs, accruing massive tax savings based on the promised network deployment. (Notice that the New Jersey Advocate did not examine these additional write-offs)
The Write-Offs Happened Across America. Using these new adjusted state regulations, which promised technology deployment as well as new competition from competitors, the Bells stated that they were now allowed to change their accounting principles, from a regulated monopoly to a "free market" company. Known as FAS 71, the Bells collectively took massive write-offs of their massive copper wiring, almost $21 billion dollars, with varying amounts accounted for in different states. We included the next exhibit showing the holding companies'write-offs. Amount Year Ameritech $3,785,000,000.00 1994 Bell
Atlantic $2,156,000,000.00
1994 BellSouth $2,718,000,000.00
1995 NYNEX $2,919,000,000.00 1995 Pac Bell $3,361,000,000.00 1995 SBC $2,819,000,000.00 1995 US West $3,123,000,000.00 1993 TOTAL $20,881,000,000.00 The Reason for the Investigations: We estimate that Federal Tax savings could be over $7 billion dollars. Since the Bells did not deploy the fiber-optic services, these write-offs, and therefore the massive TAX savings, may have not only been premature, since the copper wiring is still being used today, but also unfairly costing all telephone users more money. Jurisdictional Issues? The write-offs seem to fall under a number of laws and though the states may be responsible for the intricacies of the state law, I believe that the phone companies may have been able to hide much of their income and therefore not pay the appropriate Federal and state taxes. Also, the question of timing of the deductions of the copper plant should be in question. Since the plant is still largely in use and totally functional, who would decide the tax liabilities based on the usefulness of the networks that were written off? Then there is the question of competition and whether these companies should be allowed 'free market' status. All the Bells stated that its changes in Tax status was required because of competitors --- a free market company, by definition, has competitors. However, in the years that these deductions were taken, 1993-1995, the Bell companies did not have competition or competitors. The Telecommunications Act of 1996 was the national law that was supposed to bring in competitors. However, the parts of the law dedicated to competition, which were designed by the Federal Communications Commission (FCC), hasbeen held-up in court by the Bells. In fact, as of 1998, the Bells had not even finished the "checklist" of technical requirements that would to allow competitors to enter the market on an equal basis. According to both AT&T and MCI, in 1998 competitors can't make money. AT&T stated "they were losing $3 per customer", and have "stopped marketing local service" (Statement by C Michael Armstrong, President of AT&T, 2/11/98) while MCI's President, Timothy F. Price stated at the National Press Club, (1/22/98) that they "would not offer (resale) service to any new residential customers because... the Bells have managed to ensure that the business is not a profitable one for new entrants, who don't have government protected territories". Therefore, there was no significant competition in any state, not today and especially not in the 1993-1995 timeframe the Bells took these deductions. Finally, while the Bells' accounting as detailed in their Annual Reports clearly shows these deductions, I do not have access to their Tax filings. Therefore, We are requesting the IRS to investigate whether these deductions, and therefore the savings on their taxes, was not only improper, but also illegal, since their obligations to deliver and deploy new telephone networks were never fulfilled, and the copper plant is still in use.--- and there still is no substantial competition. We have included some corroborating information and we will be glad to answer any questions you might have about the material I have sent. If there are other government agencies that should be contacted, please let me know. We can be reached at the address given at the opening of this letter. Our phone number is. Thank you for your consideration of this material. Yours truly, Bruce Kushnick |