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Sprint Chief Defends Use of Tax Shelter

Posted on: Thursday, 6 February 2003, 06:00 CST

By TIM CURRAN, Associated Press Writer

KANSAS CITY, Mo. - Sprint Corp.'s chairman and CEO is defending his use of a controversial tax shelter reportedly responsible for his forced departure from the company.

In a letter to employees 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."

Esrey, 63, said he was told to expect the Internal Revenue Service would audit his tax returns, even though the shelter was likely to be accepted. Sprint's board knew about the tax strategy he was using, Esrey 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.

Irvine O. Hockaday Jr., former Hallmark Cards chief executive who serves on the Sprint board, declined to comment Wednesday.

The tax strategy allowed Esrey and LeMay to defer taxes from paper profits for stock options they received in 1999 and 2000. With Sprint's stock down sharply, those options are now worth far 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 executives' shares was less than $68 million, the Star reported.

"As of this time, there is no indication that the IRS agrees or disagrees with the associated tax positions taken," Esrey wrote.

The Wall Street Journal reported Thursday that Sprint's treasurer and three other high-ranking executives used the same tax strategy as Esrey and LeMay but apparently won't face discipline because the amount sheltered was much lower.

Esrey, who said an outside law firm also told him the IRS should agree with the tax strategy, acknowledged he could face personal financial disaster if rulings went against him.

"In the event of an extreme adverse outcome, and in the event of low prices for Sprint stocks, future taxes could take up most, if not all, of my assets since I have nearly all my assets in Sprint stock," he said.

Ernst & Young, in a statement Wednesday, said it provides clients with tax planning "that is appropriate and has the highest probability of being approved if reviewed by the IRS."

"Because this policy was strictly adhered to in the case of the Sprint executives, we stand by the tax advice and counsel we provided," the statement said.

While Sprint prepares for Esrey's departure, a judge in Georgia is considering whether an executive from a rival company should be held to a noncompete clause that forbids him from accepting the board's offer to replace Esrey.

Fulton County Superior Court Judge Stephanie Manis said Wednesday she would rule within a week whether to dissolve a restraining order that prevents Gary D. Forsee, 52, from leaving BellSouth to assume the top job at Sprint.

Cingular Wireless, BellSouth's mobile phone joint venture, also filed a lawsuit Wednesday to prevent Forsee from leaving. Forsee also oversees Cingular as part of his duties.

Forsee led Sprint's long-distance division for most of the 1990s before joining BellSouth in 1999.

Atlanta-based BellSouth is afraid Forsee could divulge "intellectual capital," including company price plans and merger and acquisition information.

On Wednesday, Sprint reported fourth-quarter earnings of $39 million, a substantial increase over the $1.2 billion loss it reported during the same period a year ago. The company, based in suburban Overland Park, Kan., credited cost-cutting measures, which have included 17,000 layoffs since October 2001, for the turnaround.

For the year, Sprint's reported earnings were $630 million, up from a $1.4 billion loss in 2001.

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