Today in the IRS announcd that they're targeting tax shelters in big firms, related to stock options, naming 42 companies - household names - and some of their top executives for participating in abusive tax shelters and then dropped the estimated number of $700 Million but saying it was probably lots more.
Here is where the problem lies; in the typical shelter, a corporation grants an executive stock options. The executive transfers the options to a family partnership established solely for receiving the options, usually owned by the executive, spouse and kids.
The executive takes a 15- to 30-year promissory note as payment for the options. The partnership sells the options and takes the position that taxes aren't due for 15 to 30 years.
Tax laws say executives owe tax when they exercise stock options. Corporations can take a deduction for the compensation at that time. In about half the known cases, the company deferred its deduction due to the tax sheltering arrangement.
As part of the plan the to solve this issue and close the loophole the IRS have offered an amnesty of sorts, allowing those who step forward by May 23rd and claim there part in the tax shelter and name all parties involved, will only have to pay a 10% fine on top of the taxes. Sounds like there'll be some very concerned people out there in corporate America. Damned if you do and damned if you don't.
Perhaps situations like this will start a trend of offshore out-sourcing of executives? It seems so unfair that the companies involved are legally allowed to deploy aggressive tax-avoidance strategies but the executives that decide to set-up asset protection structures, for the purpose of assuming the ownership and liability of corporate stock options, from the very companies they helped amass wealth offshore for aren't allowed to have any strategies in place to protect themselves and lessen their tax burden.
There's always another loophole...
