Ernst & Young Faces More Tax Shelter Headaches

The Internal Revenue Service is doing its best to keep Big Four firm Ernst & Young in the news this summer. The federal taxing agency is investigating a particular shelter devised and marketed by E&Y. Millions of dollars from many high profile executives could be at stake.

Earlier this month, the IRS won a $15 million settlement from E&Y as part of an agreement that the accountants would launch a new level of integrity associated with the tax shelter services provided to clients.

This week the IRS announced it is challenging a particular type of tax shelter that provides losses that have been used to offset income, including stock option gains. This particular shelter has been sold to CEOs and other executives from such companies as Eli Lilly & Co., Conseco Inc., and Sprint Corp. The co-owners of racehorse sensation Funny Cide are also investors.

William Esrey, the former chairman of Sprint and a participant in this shelter, has been in the limelight recently for participation in other E&Y sponsored shelters and for resigning his chairmanship at Sprint in the resulting maelstrom.

According to a report from Bloomberg, the shelters used partnerships set up by Memphis-based Bolton Capital Planning, and invested in currencies, purchased interest-rate swaps, and bought options tied to the performance of the Standard & Poor's 500. The partnerships generated losses that could be used to offset other income, including gains from stock options.

The IRS has designated shelters of this type as abusive. With the abusive designation, the IRS can disallow losses resulting from the shelters. The IRS has sent notices to the shelter participants warning them that the deductions generated by the shelters will be challenged. A legal battle is expected to ensue.

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