Executives who participated in an abusive tax scheme in the late 1990s linked to their stock options were offered a settlement by the Internal Revenue Service on Tuesday to settle their tax affairs by May 23.
The IRS said it had identified 42 companies, including “some of the leading listed companies”, that participated in the “inappropriate” plan.
The US tax authority did not identify the companies or executives involved in the tax avoidance schemes, but said the practice had resulted in more than $700m of income going unreported.
The IRS said the tax shelters were used by executives at the expense of shareholders, because companies often incurred higher tax bills as a result of the stock-option deals. “These transactions raise questions not only about compliance with tax laws, but also, in some instances, about corporate governance and auditor independence,” said Mark Everson, IRS commissioner.
People participating in the IRS offer, which also extends to the corporations that issued the options to executives and directors as part of their compensation, must report to the IRS all of the compensation they received untaxed plus interest anda 10 per cent penalty,as well as related employment taxes.
The IRS declined to give details about what action it would take against executives who did not participate in yesterday's settlement offer, but said it would consider additional taxes and penalties.
The IRS is scrutinising a scheme using stock options that was heavily promoted by tax advisers in the late 1990sand early 2000s before itwas identified as an“abusive” practice in2003.
Stock options are generally taxed when they are exercised, but executives involved in the abusive scheme avoided tax liabilities by transferring their options to a family entity.
Instead of structuring the transfer as a “gift”, the IRS said executives transferred the options as a “sale”, giving the executives a 30-year, unsecured promissory note as payment for the options.
The IRS said the family partnership which was often created in the name of a spouse or the executive's children then exercised the options, became the owner of the stock and sold the shares.
The scheme had the effect of leaving compensation derived from stock options untaxed for between 15 to 30 years, the IRS said.
Although the IRS's proposal appeared to be aimed at executives who participated in the scheme, the tax authority said it was also investigating the marketing of the schemes by tax professionals.
