February 23, 2005

IRS Makes Settlement Offer for Stock Option Scheme

Yesterday, the IRS 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 employers – transferred 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, in many cases, resulted in the corporation deferring a legitimate deduction for the same compensation.

To date, the IRS has identified 42 companies, many more executives and unreported income of more than $700 million involved in this scheme, which was aggressively promoted by financial advisors about 5 years ago. The IRS still is looking to find other companies that engaged in this practice.

Executives who engaged in these transactions will have until May 23rd to accept an IRS settlement offer to resolve their tax issues. The offer also extends to companies that issued the options to executives and directors as part of their compensation. Proof that the SEC is paying attention to compensation issues; Chairman Donaldson issued a statement praising the IRS’ action.

On, we have posted a host of materials related to this IRS initiative in the “Hot Topics” Box on the home page under “IRS Stock Option Settlement Offer.”

Status of Disney Trial

Many members have asked me about the status of the Disney trial. The parties have just begun briefing, which is scheduled over the next two months. Then there may be oral argument, so the decision is not likely to occur until sometime in June. And of course, there are all sorts of factors that can delay it further.

SEC Sets of Date of Internal Controls Roundtable

The SEC has set the date of its internal controls roundtable for April 13th in its HQ in Washingto DC. Panelists have not yet been selected. The SEC seeks comments on internal control issues by April 1st so that they can be considered for discussion. As an aside, by the time of the roundtable, the SEC’s HQ likely will be half-empty as the HQ move should be well underway – last chance to visit 450 5th Street!