IRS to Investigate Pac Bell - Government Activity

Cambridge Telcom Report, April 17, 2000

Last month, New Networks Institute (NNI) filed a complaint with the Internal Revenue Service charging that Pacific Bell improperly took massive tax deductions totaling $3.4 billion dollars. These write-offs were based on the Bell's claim that they were replacing older copper networks with a new information super-highway based on fiber optics. PAC Bell stated it would spend $16 billion and have 5 million households wired by 2000. Unfortunately, virtually none of these services were rolled out and few houses were rewired. However, Bell took its deductions for services that were never offered.

"In November 1993, Pacific Bell announced a capital investment plan totaling $16 billion over the next seven years to upgrade core network infrastructure and to begin building California's communications superhighway. This will be an integrated telecommunications, information and entertainment network providing advanced voice, data and video services." (Source: Pacific Telesis Annual Report, 1994)

"Today, the IRS confirmed that it would evaluate NNI's claims against Pac Bell's network write-offs," said Bruce Kushnick, executive director of NNI. "NNI has filed similar complaints against the other original Bells. The IRS is also examining our claim against Bell Atlantic for $5.1 billion. Since all of the Bells took similar write-offs, we expect that the other Bells will also be investigated," stated Kushnick.

IMPORTANT IMPLICATIONS:

* If the networks were deducted prematurely, then the write-offs would not be allowable and the monies, including penalties, should be recovered.

* If these deductions occurred, then the costs of the networks to ALL customers, from business and residential customers to competitors, should have been reduced dramatically on virtually every service.

* NNI estimates Bell overcharged more than $250 dollars to every residential customer.