Verizon's Deferred Tax Liabilities Too High?
As the nation's biggest telephone company, Verizon Communications Inc. has wrestled with growing competition from cable operators, a slowdown in its conventional land-line business, costly network upgrades and a weakened stock price.
Now, some Wall Street analysts are questioning the rapidly rising amount of money Verizon could owe Uncle Sam.
For years, Verizon has deferred certain taxes, helping the company's financial statements look rock solid. Those deferred taxes have grown fivefold in five years to $22.1 billion, the highest in the Dow Jones index of 30 industrial companies.
Verizon's tax situation -- An article in the Business section on Jan. 20 about Verizon Communications Inc. said that deferred taxes at the company increased fivefold in five years and that nearly $10 billion in deferred tax liabilities arose from depreciation of wireless licenses. The increase was threefold over four years, through 2003. The $10 billion in deferred tax liabilities was attributable in large part to the formation of Verizon Wireless, though some depreciation of wireless assets also was included.
So when Chairman Ivan G. Seidenberg insists that Verizon enjoys the "strongest balance sheet in company history," analysts like Daniel Berninger of Tier 1 Research aren't necessarily persuaded.
"This is going to be a big story this year for a number of companies because they can't get around paying it off," said Berninger, who wrote a recent report on Verizon's tax situation. "The problem is that it's a manipulation of the balance sheet and a lack of transparency. This is a terrific rock to hide things under."
He and others wonder whether Verizon's publicly reported earnings have been too rosy and whether the potential tax bill might drag down future earnings. The deferred liabilities amount to an interest-free government loan, they say, and the company will have to pay it back at some point.
Perhaps so, but probably not in cash and probably not soon, if ever, according to Verizon executives. And the potential tax obligations were amassed at the federal government's urging, they say, noting that Washington wants companies to invest in equipment and spur the economy.
"Deferred taxes arise out of the normal course of business," said company spokesman Robert A. Varettoni. Anyway, he added, the liability will remain more or less steady for years.
That's because a company that is growing and spending money on property, equipment, leases and other assets can depreciate the value of those assets much faster on income tax forms than on public financial statements. The resulting timing difference generates deferred tax liabilities.
Confused?
Welcome to the world of deferred tax liabilities, "one of the most complicated parts of the entire financial statement," said Jill Lehman, a senior analyst at the Center for Financial Research & Analysis.
