The tax shelter, know as the “tax deferral method” was utilized by William Esrey, Sprint’s chairman and chief executive and President and Chief Operating Officer Ronald LeMaythe after being promoted to the company by their auditor Ernst & Young.
The method allowed the two an opportunity to offset a large tax bill associated with profits from the exercise of options by establishing a separate investment that enables the executive to exercise his stock options without paying the taxes that would normally be due that year, according to a Wall Street Journal report citing unnamed sources.
While the exact investment method used by the executives was not given, the Wall Street Journal cited a method promoted by Ernst & Young known as “ECS” that promises to delay the income-tax bill from the exercise of options for up to 30 years by putting the options in a limited partnership that could involve family members. In return, the executive would get an unsecured promise to pay the money back, but not a note.
Under IRS rules, if the transaction was a real business deal, known as “arm’s length,” then there would be no tax bill when the options were exercised by the partnership. In addition, the partnership could sell the shares and diversify its holdings to cut the executive’s risk. However, it should be noted, while the use of such a tax shelter is currently under scrutiny, it has not been deemed illegal.