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Vermont Schools Other States on FairPoint Sale

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State and federal lawmakers are using their experience of Verizon's sale of its landline operations to FairPoint as a way to slow, or deter, sales in other parts of the country.

Late last week, U.S. Rep. Peter Welch (D-VT) and 21 members of Congress introduced legislation to close a loophole that allowed Verizon to avoid an estimated $700 million in taxes when it sold its northern New England landline operations to FairPoint Communications for $3 billion.

Meanwhile, State Sen. Vince Illuzzi (R-Essex/Orleans, pictured) has already traveled once to West Virginia, and plans another trip soon to talk to lawmakers about Vermont's experience with selling off its landlines.

Verizon used a little-known tax loophole called the Reverse Morris Trust to avoid paying taxes. It did by forcing the buyer to give Verizon shareholders more than 50 percent control of the new company.

The legislation, H.R. 4486, would eliminate the Reverse Morris Trust (RMT) provision of the federal tax code, which is being used by regulated utility companies to avoid paying taxes while divesting of public infrastructure, according to Welch's office.

FairPoint is currently in bankruptcy, and has yet to emerge from the proceedings. It has asked, more than once, to extend its date to respond to state regulators about its future plans.

“This loophole is bad for taxpayers, bad for consumers and bad for workers,” Welch said. “It’s hard to understand what public good is achieved by subsidizing a corporation’s efforts to unload public resources on a debt-saddled company.”


Under the Reverse Morris Trust, a parent company can spin off a subsidiary that merges into an unrelated company tax-free, so long as the shareholders of the parent company control more than 50 percent of the voting rights and economic value of the resulting merged company.

In FairPoint's case, it was immediately saddled with so much debt that when it ran into trouble taking over the landline business, it had little capital left to make necessary improvements and began to rapidly lose customers.

Verizon is currently attempting to use the RMT provision to avoid taxes on $3.3 billion in its proposed sale of landlines in 14 states to Frontier Communications. Lawmakers in each of those states recently wrote the House Ways and Means Committee chairman asking him to take up legislation to close the RMT loophole.

“We are concerned that consumers and workers will face the same consequences as those encountered by our counterparts in several Northeastern states, where Verizon engaged in a similar tax avoidance scheme with FairPoint Communications two years ago,” the 21 House members wrote in the December letter.

Sen.Illuzzi recently traveled to West Virginia to testify before the state's public utilities commission about Vermont's experience with the Verizon sale and FairPoint's ownership.

Illuzzi told the commission that the sale raised many red flags, including whether FairPoint had the technical ability to take on so many customers at once, as well as take on so much debt.

"Members of the West Virginia legislature have asked me to come back down and testify before them about the sale, too," Illuzzi told Seven Days.

Illuzzi has also been arguing for the creation of a tri-state commission to ensure that consumers are protected if and when FairPoint comes out of bankruptcy.

As chairman of the Senate Economic Development Committee, Illuzzi had voiced concerns about the Verizon sale, but the Public Service Department ignored much of the outcry from workers and lawmakers who believed that FairPoint would not be able to serve Vermont given its enormous debt load after the sale.

Currently, parent companies must pay taxes on gains from their subsidiaries if they receive cash payments, but not if they receive payments in the form of debt securities. H.R. 4486 would change the tax code so that debt securities paid to a parent company are taxed the same way as cash payments, removing the incentive to leave a subsidiary saddled with debt, according to Welch's office.

“It absolutely essential that we ensure our public utility companies have the resources they need to support consumers and preserve good jobs for workers,” Welch said. “Closing this loophole will make our utility companies stronger so that all Vermonters are served in the future.”

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