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Hooray for the tax man

It was August 2003 when Michael Fatale got a call from his friend Bruce Fort. It is the time of the year when most of us would be talking Sox, but not these guys: They are tax guys -- they love this stuff -- and they were talking taxes.

Fort, a lawyer for the New Mexico revenue department, wanted to know whether Fatale, a lawyer for the Massachusetts Revenue Department, had been following the giant MCI bankruptcy case. In particular, he said, the counsel for the unhappy bondholders committee had unearthed the fact that MCI (formerly WorldCom) had been avoiding state taxes by charging its subsidiaries billions for the ''foresight of top management." In short, MCI was claiming chief executive Bernie Ebbers' brain was worth billions!

New Mexico was not interested in pursuing the complicated case, Fort said, but Massachusetts, which had gone after two firms in recent years over the creative use of intangible assets, should. For Fatale it was a bolt of inspiration: ''I felt I was the right guy, in the right place, at the right time," he says. ''I knew we were going to get a big recovery out of these guys."

Think home run. Think walk-off grand slam in the seventh game of the playoffs against the Yankees. What that call and the dogged persistence of Fatale and his colleagues helped produce is a massive settlement that eventually will return about $500 million to nearly 20 states. Massachusetts, which led the 18-month legal fight, will get an estimated $34 million. We should have demanded a finder's fee.

When Fatale and two bankruptcy lawyers at the Revenue Department, Jim O'Connor and Jeff Ogilvie, embarked on their journey, with the blessing of the state's bulldog revenue commissioner, Alan LeBovidge, it was anything but a sure thing. The time for filing tax and bankruptcy claims had passed so they went to the Bankruptcy Court seeking to extend the deadline. And then they started dialing for help, calling revenue departments around the country. Eventually so many states were clamoring to get in -- 40 at one point -- that MCI agreed to extend the deadline.

''MCI never expected it was going to amount to anything," says Fatale, who has spent 13 years at the department. ''They weren't afraid of us. They were afraid of the bondholders." The essential scam was a requirement that MCI's subsidiaries pay royalties -- more than $20 billion from 1999 to 2002 -- to the parent company for strategic plans that it called ''management foresight." ''It was something that didn't pass the laugh test," says O'Connor, the bankruptcy lawyer.

Fatale says MCI tried to pick off individual states with low-ball settlement offers. It was only when the Multi-State Tax Commission, a regulatory group, did an audit that it became clear how much money was at stake. ''There were huge numbers -- $50 million, $40 million, $30 million" per state, says Fatale. ''This is when we were vindicated."

At one point, when things were not going well, Fatale and his colleagues asked the Bankruptcy Court to disqualify MCI's accounting firm, KPMG, which had designed the tax plan. The court eventually dismissed the motion, but Fatale believes it provided the leverage to get MCI to negotiate seriously. MCI's first offer was in the $120 million range, and quickly rose to more than $300 million. A final deal involving about $315 million to 15 states is expected shortly. Mississippi, where MCI once was based, settled separately for $100 million and the headquarters building. Two states are pursuing individual settlements.

Says an MCI spokesman: ''We continue to negotiate with the states and look forward to an amicable settlement."

Let Manny Ramirez, the Sox's $20 million man, belt a homer and all of Fenway is on its feet. Mike Fatale, who makes $83,864 working on the seventh floor of the Saltonstall building, just went deep for the taxpayers. That's worth a hand, too.

Steve Bailey is a Globe columnist. He can be reached at bailey@globe.com or at 617-929-2902.

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