Sprint CEO Fears Losing Everything in IRS Audit
The IRS is investigating participants in a tax shelter sold by Big Four firm Ernst & Young. The shelter, called Equity Compensation Strategy or E.C.S., was marketed by the accounting firm as an opportunity for executives with stock options to postpone taxes for 30 years on the income from their options.
According to a letter  written by Mr. Esrey and distributed via e-mail to Sprint employees, participants in the shelter were required to "sign a nondisclosure agreement because of the unique and proprietary nature" of the tax strategy promoted by E&Y. "I was assured by Ernst & Young that the investment and the tax strategy was perfectly legal," Mr. Esrey said.
The IRS may have a different interpretation of the legality of the shelter, and that worries Mr. Esrey. The former Sprint CEO postponed taxes on $159 million in profits from stock options during 1998, 1999, and 2000. Unfortunately for Mr. Esrey, the amount he received is in the form of Sprint stock, the value of which has plummeted. The stock, now worth only an estimated $39.4 million, won't come close to paying the tax bill.
"In the event of an extreme adverse outcome, and in the event of low prices for Sprint stocks, future taxes could take up most, if not all, of my assets since I have nearly all my assets in Sprint stock," Mr. Esrey said.
The IRS audit of Mr. Esrey's taxes and the agency's examination of the Ernst & Young shelter are underway.