Sprint's Fun With the IRS
Both men participated in a tax shelter in the late 1990s, which, if deemed illegal by the Internal Revenue Service, could possibly force them both into personal bankruptcy.
As telecom scandals go, it seems minor. After all, what's another stock-option-and-tax-perpetuated bankruptcy? But the Sprint board wants nothing to do with it and appears to have asked both men to leave.
Is it symbolic of telecom paranoia gone wild?
“Nothing’s happening that would suggest a crisis,” says Jeff Kagan, an independent analyst based in Georgia. “What we’re looking at here are worst-case scenarios… I think the board is overreacting.”
The Sprint executives appear to have used a system devised by accountants to work around the vagaries of paying income tax or Alternative Minimum Tax (AMT) on options. Tax problems with options have caused headaches for many Silicon Valley employees who don't sell their exercised shares right away and pay income tax (see Option Tax Nightmares Teach Lessons). But in many cases in which employees look for loopholes or ways to pay less tax, they've ended up losing millions, if not going bankrupt.
In a letter to Sprint managers yesterday, Esrey revealed that the IRS is investigating his use of tax shelters, which were recommended by Sprint’s auditor Ernst & Young. Other company executives, including LeMay, also reportedly partook in the tax scheme.
According to the letter, which Light Reading obtained a copy of today, Esrey received assurances from an outside law firm that the tax shelter would be acceptable to the IRS. He also points out that Ernst & Young continues to maintain that the tax scheme was permissible.
"[W]e stand by the tax advice and counsel we provided,” the auditor said in a statement today.
If the IRS does not rule in his favor, however, Esrey admits that he could be forced into personal bankruptcy.
“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,” he writes in the letter. “During my entire career at Sprint, I have never sold FON or PCS shares to receive income from the sale of any Sprint stock or option.”
Sprint announced on Sunday that its board is looking to replace Esrey, and news reports over the past week state that LeMay is being pushed out too (see Sprint Faces Management Muddle).
While Sprint won’t comment on why the executives have been asked to leave, the board’s concern over the tax scheme does appear to be the reason. One industry analyst says that the board may just be using the tax shelter as an excuse to make management changes. “This could just be an excuse,” says Craig Johnson, an independent analyst based in Oregon. “It’s like the infamous ‘I’m going to spend some more time with my family’ routine.”
Three other Sprint executives participated in the tax shelter, as well, according to a report in the Wall Street Journal this morning, but they are not being disciplined by the company. This, the report states, is because the amounts involved were much lower than the sums Esrey and LeMay sheltered.
No matter how the tax shelter turns out, the question remains: Who will Sprint choose to replace the exiting executives? The company has admitted that it has asked BellSouth Corp. (NYSE: BLS)’s vice chairman Gary Forsee. BellSouth, however, got a restraining order last week to stop him from moving over to the competitor. A court hearing yesterday did not resolve the matter.
“In any event, Sprint is going to go through an enormous amount of distractions… at a time when it should remain focused [on its financials],” Kagan says. “They need to make some moves quickly.”
— Eugénie Larson, Reporter, Light Reading