IRS Issues Final Stock Option Settlement Terms

March 15, 2005 ( - A final announcement has been made by the Internal Revenue Service (IRS) regarding the settlement incentive for companies and executives who transferred stock options to avoid taxes.

>While the agency has put limits on the compensation deductions under the  settlement initiative , the majority of the settlement – which executives and companies have until May 23 to comply with – remains the same. The original bulletin was put out on February 22, 2005 (See IRS: Settlement Window for Stock Scam Open until late May ).

According to the IRS, executives carrying out these transactions transferred stock 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 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, according to the government.

The settlement now offered will allow both corporations and executives to right the abuses by including 100% of the stock option compensation in their taxable income, as well as paying applicable employment taxes. Executives will get a 10% penalty for the move, but transaction costs are allowed as deductions, according to the IRS.

The slight change made to the final announcement makes it so corporations could claim the compensation deduction “if otherwise allowable in the year of transfer, exercise, or vesting,” according to the IRS.

The IRS claims that at least 43 corporations and many executives avoided $700 million in taxes.