Embarq sues government for $31.6 million in income taxes it says it mistakenly paid

Telephone company Embarq Corp. is suing the government for $31.6 million in income taxes it says it mistakenly paid for the tax years 1990 through 1994. The company says it filed federal income tax returns in those years that erroneously included as taxable income government payments it received from the Universal Service Fund. The fund helps cover the cost of extending telecommunication services to high-cost rural areas, low-income customers, schools, libraries and rural medical facilities. Embarq was Sprint's local phone division before it was spun off in May 2006. Sprint Nextel joined Embarq in the lawsuit, filed Wednesday in federal court in Kansas City (KS) because Embarq was a division of Sprint Nextel during the years in question. Any tax refunds, however, would go solely to Embarq. Embarq says it determined it should not have paid income taxes on the Universal Service Fund payments — more than $176 million during the five years in question — because the payments were non-shareholder contributions to capital. Such contributions must be excluded from taxable income. The lawsuit alleges that the Internal Revenue Service denied Embarq's request for a refund on June 20, 2007.