Corporate Execs Hustle As Major Tax Loophole Closed

Corporate executives could be scrambling to raise billions of dollars in cash this year to pay personal tax bills on their stock options because of a recent United States Tax Court ruling.

The ruling, which involved the billionaire Philip F. Anschutz but applies to scores of executives,

says that a complex strategy routinely used to turn stock options into cash and defer the capital gains taxes is invalid for deferral.

Corporate executives could be scrambling to raise billions of dollars in cash this year to pay personal tax bills on their stock options because of a recent United States Tax Court ruling.

The ruling, which involved the billionaire Philip F. Anschutz but applies to scores of executives,

says that a complex strategy routinely used to turn stock options into cash and defer the capital gains taxes is invalid for deferral.

The ruling means executives could owe $35 billion in taxes this year — taxes that they had expected to pay in the future,

Robert Willens, an accounting and tax expert based in New York, said.

Executives who did not set aside tax money and instead invested it, as many did, could face a cash squeeze,

and scrutiny, by the Internal Revenue Service.

Howard Schultz, chief executive of Starbucks, and two directors at Freeport-McMoRan, a mining company,

are among those who have used the strategy, according to Securities and Exchange Commission filings –

which, according to the previous item, may soon NO LONGER be open to the public or media !!!

Bruce I. Friedland, a spokesman for the I.R.S., declined on Friday to comment on the ruling,

noting that the Anschutz Company, the billionaire’s eponymous firm, said it would appeal.

The strategy for turning stock options into cash while deferring taxes became a popular way for executives to diversify.

The executives would lend shares underlying their stock options to a bank,

and receive cash upfront for about 85 percent of the fair market value of the shares.

In turn, the executives promised to give the bank the same number of shares at a future date.

The capital gains were deferred because — until the Tax Court ruling —

the transactions were largely seen as a lending arrangement, and not a sale.

Executives technically were buying a contract, known as a prepaid variable forward,

in tandem with a contract called a sale lending agreement.

Wall Street banks sold scores of the contracts in recent years.

With the recent ruling, which the I.R.S. supports, the Tax Court has taken the view that the arrangement is in fact a sale,

because the banks typically sold short the shares they borrowed from the executives,

to hedge against a decline in the shares’ value.

In 2000 and 2001, through Donaldson, Lufkin & Jenrette, now owned by the Credit Suisse Group,

Mr. Anschutz converted options he had in a variety of investments, including Anadarko Petroleum, into $375 million in cash.

He deferred the capital gains taxes due on the transactions, more than $144 million, for 11 years.

But in 2006, the I.R.S. began to reverse its stance that the transactions were valid for deferral,

and claimed Mr. Anschutz immediately owed nearly $144 million in back taxes.

In 2007, the Anschutz Company sued the I.R.S., asserting that it owed the money — but in the future.