An Internal Revenue Service settlement offered to
executives and companies involved in stock option abuses has resulted
in settlements with 95 corporate executives, according to the IRS.
The stock option scheme, as described by the IRS, involved executives attempting to defer tax on stock option income for up to 30 years through the transfer of stock options to family-controlled partnerships.
The IRS estimates that about 19 executives who were identified as having participated in the abuse, but did not participate in the settlement offer, underreported their incomes by a total of more than $400 million.
Those who chose not to participate are either under audit or are facing other pending criminal tax investigations, according to the IRS.
The settlement offered by the IRS required executives to include 100% of their stock option compensation in income and pay applicable interest, income and employment taxes and a 10% penalty.
"When we announced this initiative in February, we wanted to give corporations and executives a chance to turn the page and make things right," says IRS Commissioner Mark W. Everson. "The vast majority of those involved chose to come forward under the settlement's tough terms."
A financial advisor who specializes in stock options says the IRS settlement is directed at abuses that apparently arose during the height of the Internet bubble.
"I think it was the size of the option wealth and the suddenness of the option wealth that caused people" to do this, says Tim Kochis, CEO of Kochis Fitz in San Francisco. "There was a certain amount of arrogance on the part of people relative to their sense of being held to task."
Kochis says the abuses were few when compared to the amount of compensation that has been granted in the form of options since the 1990s.
"The abuses were relatively few but pretty notorious," he says. "As societies and lawmakers often do, they overreacted to those abuses and scared many companies into feeling that options were not an appropriate compensation vehicle."
The result has been a decrease in the granting of options and an increase in the utilization of restricted stocks, Kochis says.
The irony, he says, is that restricted stocks are poorly structured for use as executive compensation.
"If you have a dim view of stock options, you should have an even dimmer view of restricted stock," he says. "They provide a reward even if there is no increase in the stock's value. Typically, you can be compensated just for hanging out."
The IRS settlements resulted in about $500 million worth of income adjustments, according to the IRS.
Of 124 executives identified as having potentially been involved in the transactions, ten were cleared of any wrongdoing, 80 chose to accept the IRS settlement and 15 reached separate agreements under the IRS audit process.
Among corporations, 33 chose to participate in the settlement initiative, according to the IRS.