Tax regulators want to block an arrangement that some executives have used to cut taxes related to stock options.[@@]

The Internal Revenue Service has unveiled a new settlement program for users of the strategy, which sometimes relies on annuities, and similar strategies in Announcement 2005-19.

The program, which could affect about 175 executives, is open to executives who have transferred stock options to limited partnerships or other entities owned by the executives and their family members, according to the announcement, which was written by a group of IRS officials led by Stephen Tackney and Rebecca Asta.

The limited partnerships or other entities paid executives for the stock options with annuities or notes.

Executives who transferred options to limited partnerships before July 2, 2003, and are not yet involved in court proceedings concerning the tax treatment of the transactions can settle with the IRS by taking a number of steps.

The settlement terms for executives who have exercised their options include a requirement that executives recognize total compensation income equal to the fair market value of the stock covered by the stock options, include a portion of any annuity payments in the executives’ income, and pay a penalty equal to 10% of the amount of an underpayment of taxes resulting from the transactions. Executives who disclosed the transactions may be able to avoid paying the penalty.

Similar rules apply to executives who have not exercised their options.

“Execution of a closing agreement under this settlement initiative does not affect the application of gift, estate and generation-skipping transfer taxes which may result from the transactions covered by this settlement initiative,” the authors of the announcement write.

The IRS has posted the announcement at http://www.irs.gov/pub/irs-drop/a-05-19.pdf