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 other related entities typically created for the sole 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. Under the terms of the settlement, 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 applicable 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. "I commend the IRS for resolving this matter," said Securities and Exchange Commission Chairman William Donaldson. "It is important that leaders in our capital markets avoid inappropriate conflicts of interest such as those described in the IRS's executive stock option initiative. The IRS's settlement initiative is a step forward in the effort to protect the integrity of our capital markets. We will continue to work closely with the IRS and other government agencies to fulfill our mandate." "I appreciate the IRS's effort to flush out the participants in this scheme," said Sen. Chuck Grassley, R-Iowa, the chairman of the Senate Finance Committee. "The agency plays a key role in enforcing a zero-tolerance approach to executive tax evasion. Executives are like other taxpayers. They have a duty to pay every penny they owe, not a penny more or a penny less."
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