Sprint CEO Defends Use of Tax Shelter

Sprint Corp.’s chairman and chief executive is defending his use of a controversial tax shelter reportedly responsible for his forced departure from the company.

In a letter to employees Wednesday, William T. Esrey said he was assured that the investment and tax strategy recommended to him in the late 1990s by the telecommunications company’s auditors, Ernst & Young, “was perfectly legal.”

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

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.

People familiar with the situation said the board had been weighing the matter for months.

The tax strategy allowed both men to defer taxes from paper profits for stock options they received in 1999 and 2000.

With Sprint’s stock down, those options are worth far less than they were two years ago.

Documents filed with regulators indicate that Esrey and LeMay may have put options into shelters that produced a profit of $311 million when exercised, according to another news report.

Without the shelters, they would have owed more than $123.3 million in income taxes.

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

Sprint’s treasurer and three other executives used the same tax strategy as Esrey and LeMay but apparently won’t face discipline because the amount sheltered was much lower.

Esrey 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.

Shares of Sprint fell 35 cents, to $12.17, on Nasdaq.