KANSAS CITY, KAN. Sprint Corp.'s chairman and CEO is defending his use of a controversial tax shelter said to be partly responsible for the Sprint board's reported decision to force out him and his second-in-command.
In letter to Sprint employees released Wednesday night, William T. Esrey said he was assured that the investment and tax strategy recommended to him in the late 1990s by the telecommunication company's auditors, Ernst & Young, "was perfectly legal, was within the rules of the complex IRS code, and that there was a high degree of probability that this would be accepted by the IRS, although the IRS would most likely audit the returns."
And, he said, Sprint's board knew about the tax strategy he was using.
"I have kept the board updated over the last two-plus years about these issues," he said.
The Wall Street Journal reported Wednesday that Esrey and Ronald LeMay, Sprint's president and chief operating officer, were being forced out because of a boardroom dispute over their use of the tax shelters. The Journal said people familiar with the situation said the board had been weighing the matter for months.
The tax strategy, said to be similar to what many other top corporate executives have used, allowed Esrey and LeMay to defer taxes from on-paper profits for stock options they got in 1999 and 2000.
With Sprint's stock down, those options are now worth substantially less than they were two years ago.
The Kansas City Star said documents filed with regulators indicate that Esrey and LeMay may have put options into shelters that produced a profit of $311 million when exercised. It said that without the shelter, they would have owed more than $123.3 million in income taxes. As of Wednesday, the total value of the two executives' shares was less than $68 million, the Star reported.
Esrey said in his letter that his tax shelter transactions, as he was told to expect, are being audited.
"As of this time, there is no indication that the IRS agrees or disagrees with the associated tax positions taken," he said. "There has been no assessment of additional taxes due and there continues to appear that there is no chance of penalties being assessed."
But Esrey, who said an outside law firm also told him the IRS should agree with the tax strategy, acknowledged that he could face personal financial disaster if rulings went against him.