Gimme Shelter and, Oh, a Really Good Lawyer

Today, a pop quiz about the state of ethics, taxes and wealth in the United States.

1. It was recently disclosed that William Esrey, the chief executive of Sprint, exercised stock options for a profit of $140 million to $159 million in 1999 and 2000. According to news reports, the now 63-year-old tycoon “sheltered” this part of his fortune so he would not have to pay income taxes on it for 30 years.

True or False: Entrepreneurial spirit is what makes America great.

2. Esrey took advantage of a shelter arranged by Sprint’s accountants, Ernst & Young, and said he received a lawyer’s opinion that it was “perfectly legal” to leave the obligation of taxpaying to others.

True or False: All Americans must share the burden to make sure our corporations get the very best talent, otherwise we might not get a dial tone when we pick up our telephones.

3. According to news accounts, Mr. Esrey, once named a “Top 25” executive by Business Week, excused himself from as much as $63 million in taxes. Using the same shelter arrangement, Sprint’s chief operating officer, Ronald LeMay, made $149 million to $152 million on options and reportedly avoided up to $60 million in taxes.

True or False: Wealthy individuals need more incentives to get the country going, so Congress should swiftly pass President Bush’s income tax cut.

4. Eight months after the New York Times disclosed this tax shelter arrangement, we learn that the IRS has swung into action and is scrutinizing the deals.

True or False: Heavy-handed and arbitrary government bureaucrats will stifle individual creativity at every turn.

5. In an e-mail to his employees, Esrey noted that his hoard of Sprint stock had shriveled in value and said that “in the event of an extreme adverse outcome,” that is, if he got nicked for back taxes and penalties, he would lose “most if not all of my assets.”

Question: What do you suppose Esrey meant in a speech two months ago in which he said the future would belong to those “who are ethical and set high standards”?

6. Ernst & Young is widely known for its biannual surveys of business fraud. It is also known for having absorbed many offices and hundreds of accountants from the disgraced Arthur Andersen firm. Analysts at Ernst & Young warned that public outcry about corporate scandals “sends a clear message.” In a separate statement to journalists, Ernst & Young says it is standing by its private tax shelter advice for executives.

True or False: In 1994, when the Supreme Court ruled that income taxes should cover “all income from whatever source derived,” it did not mean to include nine-figure income from stock options for executives who run corporations.

7. Published reports say Esrey and LeMay have been quietly dismissed by Sprint’s board of directors out of fear of a public relations backwash, although the company has not confirmed this. At least four other Sprint executives, however, reportedly will be kept on the payroll even though they took advantage of the same tax shelters. According to insiders, it was a matter of degree. The lesser executives had fewer stock options to shield from the tax collector.

True or False: In the U.S., it’s ethical to wriggle out of tax obligations as long as you don’t get carried away.

8. In a separate case involving tax shelters and the IRS crackdown, Ernst & Young is being sued by clients who say they were lured into an “illegitimate tax sham.” According to news reports, four entrepreneurs built and sold a computer business for $70 million. They paid Ernst & Young handsomely for a plan that reduced their income taxes to nearly nothing. Now they say they were exploited because they didn’t quite understand what they were doing. Ernst & Young called the suit frivolous.

Question: Would you rather (a) be a juror for four months to decide right and wrong between these two parties or (b) parachute with the 101st Airborne into Baghdad?

9. Turning from national to state matters: My colleague Dan Walters, columnist at the Sacramento Bee, recently disclosed an odd quirk in California tax law. A family that buys an $18,000 fishing boat must pay about $1,400 in sales taxes. But a family with the wealth to buy a $500,000 yacht can escape sales tax and save $40,000 by making the purchase offshore and keeping the boat in a 90-day tax quarantine in Mexico at a marina set aside just for that purpose.

True or False: The term “trickle-down economics” was first used on the flying bridge of a yacht en route from Ensenada to Los Angeles.