IRS Announces ‘Robust’ Results From Executive Stock Option Scheme

by Leroy Baker, Tax-News.com, New York

13 July 2005

The Internal Revenue Service has announced a "robust" response to the executive stock option initiative, a scheme which allowed corporate executives and their companies to settle disputed stock option transactions regarded as abusive by the IRS.

Under the disputed stock option scheme, executives attempted to defer tax on stock option income for up to 30 years. The settlement required executives to include 100 percent of their stock option compensation in income, pay applicable interest, income and employment taxes and pay a 10-percent penalty.

“When we announced this initiative in February, we wanted to give corporations and executives a chance to turn the page and make things right,” stated IRS Commissioner Mark W. Everson.

“The vast majority of those involved chose to come forward under the settlement’s tough terms. The response reflects higher standards for corporate governance and less tolerance for abusive tax transactions," he added.

Of 124 executives identified, 10 were determined not to have participated in the abusive transaction. Of the remaining 114, 80 executives elected to participate under the terms of the settlement offer. Fifteen other executives reached agreement through the audit process. Nineteen individuals did not elect to participate. Those who declined to participate in the settlement offer are either under audit or had other pending criminal tax investigations.

Those executives who elected to participate or otherwise resolved their tax liability have $500 million in potential income adjustments. The IRS estimates that the 19 executives who did not participate in the settlement offer underreported their income by more than $400 million.

Of 46 corporations identified, four were found to have correctly reported the transaction on their returns. Of the remaining 42 corporate participants in the transaction, 33 elected to participate in the settlement initiative. Four corporations had passed the statute of limitations for audit although their related officers elected to participate in the initiative. Five corporate taxpayers elected not to participate.

The settlement initiative attracted four new companies and seven executives that had not previously been known to the IRS.

The IRS also released the latest figures on its 'Son of Boss' settlement offer, a 2004 initiative to resolve another abusive tax shelter transaction. To date more than 1,200 electing taxpayers have qualified to participate in this offer. The taxes, interest and penalties collected from this group has now topped $3.7 billion.

Son of Boss evolved from an earlier scheme known as ‘Boss’ (bond and option sales strategy). The scheme utilised a complex set of derivative transactions to reduce tax liability and was commonly used in the late 1990s to offset large one-off gains such as the sale of a business.

“We are still processing a number of the more complicated elections and expect the final tally will be near $4 billion,” Everson explained.

About 750 taxpayers did not elect or did not qualify to participate in the Son of Boss settlement offer. The IRS will continue to pursue these cases through audits and the normal litigation process. So far, more than 100 Son of Boss cases are in court and the IRS expects the first cases to go to trial by early fall.

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