Hodes eyes repeal of tax loophole
CONCORD – U.S. Rep. Paul Hodes hopes to repeal a federal tax loophole Verizon employed to gain a $300 million windfall when it sold telephone landlines to Fairpoint Communications.
The tax break is blamed for leaving Fairpoint with $1.7 billion in debt that contributed to the company filing for bankruptcy last October.
Known as a Reverse Morris Trust, it allows companies to avoid paying federal capital gains taxes if the selling firm’s shareholders still own a majority of shares in the post-merger firm.
“It became clear and was clear a couple of years ago that this should be eliminated,” Hodes said of the tax break during a conference call with reporters.
It has been employed for similar mergers through the sale of securities rather than cash in many industries.
“I think it’s important that we address the issue as part of any tax legislation we consider this year,” Hodes said.
Rep. Alan Mollohan, D-W.Va., is joining this effort because Verizon could get an estimated $600 million bonus if it gets approval to sell its rural telephone network in West Virginia and 13 other states to Frontier Communications.
Verizon got a similar tax break when it sold landlines to Hawaiian Telecom in Hawaii.
“Our experience up here was saddling a small company with huge amounts of debt created real problems for consumers who depend on telephone services as their lifeline,” Hodes said.
Hodes is a Democratic candidate for the U.S. Senate seat Republican Judd Gregg will retire from at the end of this year.
A spokesman for the Republican State Committee said it’s no coincidence Hodes only sought legislation on the subject this year when he faces a tough Senate campaign.
“It is empty political posturing and a desperate attempt to compensate for dismal approval ratings,” said GOP Communications Director Ryan Williams. “It is a political stunt.”
Hodes’ office produced a June 2007 letter co-signed by all House members from Maine, Vermont and New Hampshire asking Ways and Means Chairman Charles Rangell, D-N.Y., to “review” Reverse Morris Trusts.
“The provision appears to be a tax avoidance without a clear, public policy rationale,” they wrote.
At no time did Hodes publicly oppose the Verizon sale to Fairpoint.
In September 2007, Hodes and the same House members from New Hampshire, Vermont and Maine urged the Federal Communications Commission to do a “thorough and extensive review” of the sale and to delay acting until state regulators in the three states completed their work.
Communication Workers of America President Larry Cohen said it was not the fault of Congress but the handiwork of accountants and lawyers for Verizon and other corporations that led to widespread use of this trust to avoid paying federal taxes.
“K-Street and Wall Street lawyers created this policy; Congress didn’t create this policy,” Cohen said.
Edwin Hill, international president of the IBEW, said the union did first raise the issue for Verizon back when the Fairpoint sale was first announced in January 2007.
“We have been arguing this point to anybody who would listen for the last three years,” Hill said.
Mollahan admitted to reporters that getting rid of the tax break through legislation this year would not be easy.
Mollahan did not rule out trying to attach this provision to other legislation later this spring or summer such as the FCC’s own budget.
He’s more optimistic about convincing state regulators in his home state to oppose the Verizon sale to Frontier.
“I suppose the answer might be that New England has to have demonstrated the very bad policy and consumer consequence for this before it came to the attention of anybody,” Mollahan said.
Kevin Landrigan can be reached at 321-7040 or firstname.lastname@example.org.