IRS might resist Exxon Mobil’s tax plan
As he prepares for a confirmation hearing on becoming secretary of state, Rex Tillerson, Exxon Mobil’s former chief executive, wants to hold on to a big benefit: deferring income taxes on company shares worth around $174 million.
But tax experts say the plan devised by Exxon Mobil to let him do that may run into trouble with the Internal Revenue Service.
Questions about Tillerson’s compensation may come up Wednesday at his hearing before the Senate Foreign Relations Committee. He is one of several top business executives Trump has nominated to Cabinet positions, setting up a continuing focus on how they will deal with the assets they must shed to comply with government ethics rules.
During his 41 years with Exxon Mobil, Tillerson has either accumulated or earned a right to receive more than 2 million shares he is not yet eligible to sell. All told, those are worth about $174 million at Exxon Mobil’s current share price. Under a typical executive compensation arrangement, executives can defer the tax bill on their shares until they are eligible to sell, a process known as vesting.
To comply with government ethics rules that require him to sell his stake, and to compensate Tillerson for his shares that have not yet vested, Exxon Mobil has constructed a creative solution: If he is confirmed, the company will cancel the shares and move a pile of cash with roughly the same value into a newly created trust with Tillerson as the beneficiary. The trust will invest the cash in Treasury securities and other permitted assets and then make payments to Tillerson over the next decade.
Tillerson will owe taxes at ordinary income rates as he receives the payments, the company expects, mimicking the tax treatment he would have received if he had stayed with the company.
Tax advisers, however, question whether that is the right way to handle it.
Robert Jackson Jr., a law professor and executive compensation expert at Columbia University and a former Obama administration Treasury Department official, said Tillerson should owe the full tax upfront because the cash will effectively be his, with little chance that he will lose it.
“Everything in the trust is his property today, which means he must pay tax on it,” Jackson said. The notion that Tillerson should defer the tax is “a loser of a position in front of the IRS,” he added. “He should pay income tax this year.”
Here is why: Incentive compensation plans like the ones at Exxon Mobil usually mean executives receive stock with restrictions on when they can sell. In Tillerson’s case, he has about 2 million Exxon Mobil shares — or the right to shares — that will vest over the coming decade.
For executives to defer taxes on restricted stock, the shares must be subject to a “substantial risk of forfeiture.” Put another way, if the company simply gave the stock to the executives with no strings attached, they would be taxed. But since the executives must meet certain criteria, like continued employment with the company, they get to defer taxes on their restricted stock.
An Exxon Mobil spokesman said he expected the deferral benefit to stay in place.