MCI WorldCom Bankruptcy
Proceedings of the MCI WorldCom bankruptcy, the largest in history, included claims by dissident creditors regarding intangible assets and compliance with the "arm's length" standard within the meaning of transfer pricing rules. MCI WorldCom had charged royalties to its operating companies for the "management foresight" of MCI WorldCom top management, effectively minimizing state income taxes of the MCI WorldCom group of companies. The royalty charged amounted to more than $20 billion over three years, exceeding the total operating earnings of these operating companies.
Analysis Group was engaged by the dissenting creditors to provide expert opinion on whether the management expertise and foresight were intangible assets within the meaning of the transfer pricing rules and, notwithstanding how they were considered, whether the royalty rates charged were arm's length. An Analysis Group expert provided analyses in support of the dissident creditors' claims. The bankruptcy examiner's report, which also included assessment of potential back taxes owed by MCI WorldCom, discussed the same issues, and was highlighted in national media. The case was settled just prior to trial.