Washington - The Internal Revenue Service has announced a settlement initiative for executives and companies that participated in an abusive tax avoidance transaction involving the transfer of stock options or restricted stock to family-controlled entities.Under this scheme, executives, often facilitated by their corporate employers, transferred stock options to family-controlled partnerships and related entities typically created for the purpose of receiving the options and avoiding taxes on compensation income normally taxed to the executive. The tax objective was to defer for up to 30 years taxes on the compensation, and the plan resulted, in many cases, in the corporation deferring a legitimate deduction for the same compensation.
"These transactions raise questions not only about compliance with the tax laws, but also, in some instances, about corporate governance and auditor independence," said IRS Commissioner Mark W. Everson. "These deals were done for the personal benefit of executives, often at the expense of shareholders."
Corporate executives who engaged in these transactions will have until May 23, 2005, to accept an IRS settlement offer to resolve their tax issues. The offer also extends to corporations that issued the options to executives and directors as part of their compensation.
Participating executives must report 100 percent of the compensation and must pay interest and a 10 percent penalty. This is one-half of the maximum 20 percent penalty. Corporations and executives must also pay appropriate employment taxes. The parties will be allowed to deduct out-of-pocket transaction costs, typically promoter and professional fees. Corporations will be allowed a deduction for the compensation expense reported by the executive.
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