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Execs, companies take deal on underpaid taxes

Associated Press
Published July 12, 2005

WASHINGTON - Dozens of executives and over 30 corporations have agreed to take advantage of an IRS program offering reduced penalties to those accused of trying to hide income through an abusive tax shelter.

The executives' taxable income could be adjusted upward by $500-million. Nineteen executives who did not participate in the program face audits or criminal tax investigations into whether they underreported income by $400-million.

IRS commissioner Mark Everson said the compliance attests to a changed atmosphere in corporate America since recent company collapses and executive prosecutions.

Executives had until May 23 to report their involvement in the shelter and participate in the settlement program, which requires them to pay a 10 percent penalty - half the 20 percent penalty that could have been applied.

Companies that participated faced no penalties, but they had to disclose the names of all executives who participated in the tax shelter. The IRS contacted the senior management of corporations known to have used the shelter and recommended that the matter be reviewed by the board of directors' audit committee.

In the typical tax 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 children.

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 that executives owe tax when they exercise stock options.

In announcing the program in February, Everson said the delayed deductions and the role of financial advisers, who recommended the shelters and served as company auditors, raise questions about corporate governance. In some cases, company employees overrode payroll systems to avoid reporting the income on executives' W-2 wage and tax statements.

All told, 124 executives were targeted by the agency. It determined 10 of them had not participated in the abusive transaction, leaving 114 as targets. Of those, 80 agreed to participate.

[Last modified July 12, 2005, 01:26:22]

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