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Windstream Teaches AT&T, Comcast, Verizon, Others How to Avoid Federal Income Taxes

A gift from the American taxpayer, willing to make up the difference.

Another corporate tax cut

Wall Street rallied around big telecommunications company stocks this week as news spread that Windstream has found a way to avoid paying federal income tax by converting its copper and fiber networks and other property assets into a tax-exempt trust.

Windstream says it has already won Internal Revenue Service approval to convert all of its network assets into a publicly traded “real estate investment trust.” REIT’s pay no federal income taxes, and if other large telecom companies follow Windstream’s lead, taxpayers will have to make up the estimated $12 billion in lost tax revenue annually.

Investors are excited by the prospect of a major reduction in tax exposure for some of America’s richest telecommunications companies. Windstream was rewarded the most with a 12 percent boost in its share price – a two-year high for the largely rural phone company. But AT&T, Verizon, Comcast, Time Warner Cable, and Cablevision also saw stock prices rising over the possibility of major increases in dividend payouts to shareholders from the proceeds of the tax savings.

REIT conversions are just the latest trick in the book corporations have used to cut, if not eliminate most of their tax liabilities. REITs are exempt from federal taxes as long as they distribute 90 percent of taxable earnings back to shareholders. Democrats in Congress have been busy fighting their Republican colleagues offer efforts to drop the practice of inversion — allowing companies to cut taxes by relocating offshore. Robert Williams, an independent corporate tax consultant, told Bloomberg News the Democrats have their hands full with that this year and are unlikely to be able to also devote resources to closing the REIT tax loophole.

“Management teams will surely look closely at emulating Windstream because the tax savings are potentially so significant,” said Craig Moffett, an analyst at MoffettNathanson LLC, in a note. “For a company like AT&T, where free cash flow has been under pressure and management has been willing to push hard to save on taxes, the appeal must surely be great.”

staxIf a high-profile phone or cable company moves to enact an REIT, that might be enough to provoke Congress to act, warned Moffett.

“The biggest hurdle in this process is getting the private letter ruling from the IRS, and we’ve got that,” David Avery, a spokesman for Windstream, told Bloomberg. The deal doesn’t need the consent of the Federal Communications Commission, Avery added.

Windstream’s tax savings will cut company debt by around $3.2 billion and produce about $115 million annually in free cash flow. Although Windstream chief financial officer Tony Thomas vaguely promised to use some of the money to invest in broadband upgrades, he was more specific about the benefits Windstream’s REIT will have on the company’s growth agenda. It can use the savings to “acquire other network assets to grow,” — business jargon meaning more merger and acquisition deals, this time fueled by Windstream’s slashed tax bill.

Wall Street investment banks paid to advise on Windstream’s REIT conversion are promoting the concept to other telecom companies as easy to replicate and profoundly profitable. But who should share in the new found wealth?

“People are asking the question if these tax benefits should be passed on to the end user — you and I when we pay our phone or cable bill — versus going to the corporation,” said Phil Owens, vice president at Green Street Advisors, a real estate research firm in Newport Beach, California, that has counseled companies like Equinix on REIT conversions.

Don’t count on it.

Currently there are 8 comments on this Article:

  1. Do you think the capital markets will want this type of REIT to operate like the towers and datacenters (and malls and commercial office buildings?) in opening up to more tenants? Does financial separation lead to structural separation over time?

    • It is no surprise to me to see companies like cell tower asset holders rush headlong in this direction, and clearly companies like AT&T wanted these assets off their books. But… wait a second, now they can use them to help avoid the tax man. What a conundrum!

      Maybe it will ease the asset dumping, but I am more than a little uncomfortable seeing another tax loophole get exploited by companies that are expert at avoiding a lot of taxes (and never passes on the savings to us.)

      The Reverse Morris Trust is still with us at least four years after Verizon’s landline dump.

      • My question is does it open up layers 1-2 to wholesale? Maybe not overnight, but eventually?

      • txpatriot says:


        If the law requires that 90% of taxable earnings be returned to shareholders, why would you be upset that the companies are not returning the savings to customers? They are only doing what the law requires, and surely you are not suggesting that corporations break the law?

        • Aaron says:

          txpatriot, I’m having a hard time understanding your stance here. The way I interpret what Phillip is saying, is that it upsets him that a company would exploit a tax loophole and not bother to pass the savings on to the customer.

          You responded with the point that the law requires 90% of TAXABLE earnings to be returned to shareholders. But, if the company is exploiting a tax loophole, doesn’t that imply that the “new” earnings no longer fall under the TAXABLE category? If so, then no, Phillip is not suggesting that corporations break the law, he’s suggesting that when they exploit the law that the least they could do would be to throw some table scraps or a bone off the table for us low-life customers to have a taste of the savings.

          Am I misinterpreting your stance txpatriot, or perhaps not understanding the law correctly? I honestly did not even know the law required 90% of taxable earnings to be returned to shareholders (if that is truly the case) so I would not be surprised if I were looking at this from the wrong point of view.

          • txpatriot says:

            @Aaron: your difficulty comes because it is I who confused the issue in my answer, not Phillip, and so once again, I owe Phillip an apology, and I owe you a thank you for showing me how mixed up my answer actually is.

            Yes, the law requires that 90% of taxable earnings be passed back to shareholders in order to qualify for the tax break. So obviously a pre-condition of the tax break is that 90% return to shareholders. My answer concentrated on that, but that’s not what Phillip is talking about.

            Once the 90% requirement has been met, THEN the ISP avoids taxes otherwise due. What happens to the taxes saved? THAT is what Phillip is talking about, and he asks a fair question about whether those tax savings should be shared with the customers who paid for them in the first place.

            A case can certainly be made that savings could be passed on to customers, or prices reduced, or additional service provided w/o additional charge. There are several ways the benefit could be shared with customers. I don’t take a position on any particular proposal.

            A direct pass-along is difficult, because the customer base that paid the rates (including the higher taxes) is not the same customer base at the time the ISP experiences the tax savings (due to the time lag between paying taxes and filing your return; customers come and go, the services and prices they pay changes over time, etc.)

            • Aaron says:

              I’m guessing this is where the debate really lies: should the laws be changed so that there are less of these tax loopholes that only benefit the corporations that can exploit them?

              Conservatives would argue that the money saved by exploiting these loopholes can be used to either reduce prices for customers or re-invested in the company to create more jobs or something along those lines. The opposing argument is that (as this case seems to imply) the money saved by exploiting these loopholes will simply be used to line the inside of shareholders’ or politicians’ pockets, and there is little (if any) real benefit to the community or the customers.

              I’m paraphrasing what I believe these two sides of the debate would be, but I am more interested in hearing what those who have an actual argument to make would have to say about it. Do you have an opinion on that matter?

              Personally, I would say that if corporations would act more in the public’s interest in these cases (the good of the many) instead of just keeping the savings for themselves (the good of the few) then there would not be a need to change the laws. Since this is not the case, I would say that the good of the many outweighs the good of the few, and if corporations refuse to abide by that philosophy then they should not have these laws to exploit any longer and the laws should be changed accordingly.

              • txpatriot says:

                Tax policy is designed (theoretically) encourage those things we want (tax breaks) and discourage those things we don’t want (additional taxes or penalties).

                So what is ti we are encouraging with this tax break? Is it further deployment of networks? If so, that should be benefit enough. If ISPs aren’t using the tax savings to reinvest in their networks, then the incentive is not working and we should delete it from the tax code.

                I’m not a fan of incenting corporate behavior via the tax code, but if we’re gonna do that, let’s see what works and keep it; let’s also see what doesn’t work and delete it.

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