Will IRS Investigations Threaten Merger?

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A law firm representing T-Mobile, on November 8, requested binding relief from a proposed IRS rulemaking that might otherwise limit T-Mobile’s ability to utilize Sprint’s Net Operating Losses (NOLs). The letter was followed by one on November 12 from the Broadband Tax Institute, in support of the carriers, both of whom are members of the organization. The letters could signify significant liability arising from the ongoing investigation into Sprint allegedly overcharging the government for more than $800,000, on Lifeline accounts that did not qualify for reimbursement under the plan, according to Craig Moffett of MoffettNathanson.  

“Sprint took a rather significant charge in the most request quarter to reverse the overbilled revenues, but they have not yet attempted to estimate penalties, if any,” Moffett said. “As we’ve pointed out in the past, the FCC has a framework for evaluating Lifeline over-collection violations which suggest the penalty could be as high as $5K per line, or as much as $4.4B total.” 

At the time, Sprint said it had no intention of defrauding the government. The carrier says it made an error after the FCC implemented new rules in 2016. Sprint was working on a fix, it said in September, Inside Towers reported.  

 Sprint had federal NOL “carryforwards” of $21.3B as of March 31, 2019, according to the Daily Tax Report. Note: a “carryforward” is an accounting method of allowing companies to apply losses to profits that have not yet occurred and thereby reduce the taxes they pay on those profits.  

T-Mobile’s letter follows an earlier letter from the law firm Skadden Arps, on behalf of Sprint, dated October 21, requesting similar relief. The Skadden Arps letter notes that, “It is therefore likely that further extensions of the Outside Date or other amendments to the Agreement will be required before the transaction ultimately closes; as the parties consider how to approach these amendments, it is critical for Sprint and T-Mobile (as well as similarly situated taxpayers) to have certainty on whether or not the modifications to the longstanding guidance contained in Notice 2003-65 will be in effect with respect to such transactions.”

 The letter from the Broadband Tax Institute asks for the same relief. “We respectfully request that Treasury and the IRS issue binding guidance as soon as practicable to provide transition relief that would ‘grandfather’ publicly announced and/or publicly filed transactions (collectively, ‘publicly announced transactions’) that close after the finalization and publication of the Proposed Regulations,” the letter states.

 The comment period with respect to the proposed IRS regulation closed on Tuesday, November 12.  

 “Whether this issue, or the Lifeline issue, is enough to trigger a renegotiation of the exchange ratio, or simply an indemnification from Sprint shareholders (i.e. SoftBank) in the event of an adverse outcome, is unclear,” Moffett said. “As a reminder, the merger agreement between Sprint and T-Mobile expired on November 1, and either party is allowed to walk away from the deal unless and until a new agreement is reached, potentially with new terms and/or a new valuation.” 

When announcing the kinds of public service projects a merged entity can accomplish, T-Mobile CEO John Legere told reporters last Thursday the merger agreement talks with Sprint are ongoing.  

By Jim Fryer, Managing Editor, Inside Towers

November 15, 2019

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