The ECS Tax Shelter: A Retrospective

Stephen B. Cohen, Georgetown University Law Center


This past July 1 marked a Tax Shelter anniversary. On that date twelve years ago, the IRS issued Notice 2003-47, challenging the deferral of income by corporate executives using the so-called ECS, an acronym variously interpreted to mean the Executive Compensation Solution, the Executive Compensation Strategy, or the Executive Compensation Shelter.

Issuance of the Notice was a powerful deterrent. Taxpayers immediately ceased entering new ECS arrangements. Eighteen months later, the IRS made an offer of settlement to taxpayers who had entered into an ECS transaction before the date of the Notice. In return for payment of asserted back taxes, plus interest, plus a 10% understatement penalty, Taxpayers could avoid even greater penalties. Most taxpayers engaging in ECS arrangements accepted the settlement offer. There is only one documented reference to a taxpayer who resisted the IRS position in the Tax Court, and there has been no reported decision on that case, suggesting that the taxpayer in question also decided to settle.

Notwithstanding the Notice’s success, it failed to provide an adequate explanation or justification of the grounds for invalidating the ECS. The IRS argument was incomplete and contradictory. Because of these weaknesses in the reasoning, a taxpayer might still try to defend the ECS shelter. Even if the risk of an ECS resurrection is low or nonexistent, it may be useful for the sake of doctrinal coherence to formulate a sounder basis for the IRS position. This essay describes the weaknesses in the Notice’s reasoning and attempts to provide a more principled rationale for invalidating ECS transactions.