Beware of ìToo Good to Be Trueî Tax Advice

By Tom Taulli

Last week, the two top executives at Sprint announced that the reason for their abrupt departure was the use of a very aggressive tax shelter. The tax shelter relied on a sophisticated array of trusts, limited partnerships, and off shore vehicles to defer taxes on large gains on employee stock options (up to 30 years).

The mastermind of this tax shelter? It was Sprintís auditor, Ernst & Young. E&Y had the executives sign a nondisclosure agreement because the tax strategy was highly proprietary. The tax gurus even said it was inevitable that there would be an audit. However, they also said it was likely that the tax strategy would pass muster with the IRS.

Perhaps the experts were wrong. During the past year and a half, the IRS has indicated that it wants to crack down on these shelters (calling them "abusive tax shelters"). If so, the two executives at Sprint could be in jeopardy of personal bankruptcy. It was this prospect that motivated the board of directors to unseat the executives.

How does this apply to the M&A context? It is very relevant. If you sell a business and realize a substantial windfall, you will be contacted by aggressive tax planners to find clever ways to reduce the tax bite. While there are many legitimate strategies, you need to take precautions. As we all know now, the major accounting firms are far from perfect.

Keep in mind that the fees on these tax strategies are quite lucrative for accounting firms. In other words, there is a big incentive to offer aggressive tax shelters to newly minted millionaires who may not have a good grasp of the tax system.

Look at the case of several entrepreneurs who cashed out of their successful software company in the late 1990s. They attended a tax seminar for KPMG and heard a hard-sale pitch for a tax shelter. It was presented as ìbulletproof.î There was also name dropping ñ such as that Dale Earnhardt, the race car driver, saved millions from the strategy.

Tips

The IRS was not impressed and audited the entrepreneurs and eventually settled. Now, the entrepreneurs are suing KPMG.

Here are some tips to keep in mind if an accounting firm offers a tax shelter on a windfall:

? Can you understand it? Or is the tax expert trying to obfuscate the strategy? If the latter, be wary.
? Get a second opinion from another firm. Also, seek an opinion from an independent law firm ñ that has no dealings with the tax firm. This should help avoid IRS penalties if the shelter is overruled.
? Has the IRS provided a letter ruling on the strategy? If not, you are taking a big risk.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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