(Bloomberg) The two top Sprint Corp. executives who were caught up in a tax-shelter scandal in 2003 now blame the Internal Revenue Service for losing their jobs.

William Esrey
(Photo: Haruyoshi Yamaguchi/
Bloomberg)

Former Chairman and Chief Executive Officer William T. Esrey and Ronald T. LeMay, a former president and chief operating officer, sued the U.S. government Friday over claims they were unfairly forced out of the company after disclosing they were being audited over the use of shelters that deferred taxes from stock option profits. The two men are seeking almost $160 million in combined damages in a complaint filed in Manhattan federal court.

Esrey and LeMay allege that Ernst Young LLP, which sold them the shelters, “withheld material information” about civil and criminal investigations into the tax strategies and that the U.S. Internal Revenue Service also “helped hide information” about the probes from the executives.

“As a result of EY’s breach of fiduciary duty and of the IRS’s active concealment of the criminal investigation and the truth about the tax shelter promoter audit, Esrey and LeMay could not defend themselves against allegations by Sprint and Sprint shareholders” over the tax shelters, the executives said in the complaint.

Amy Call Well, a spokeswoman for EY, had no immediate comment on the complaint. Representatives of the Justice Department didn’t immediately respond to a request for comment.

Esrey and LeMay stepped down from the Overland Park, Kansas-based communications firm as government scrutiny of the tax shelters mounted. Serving as an adviser to the executives, EY helped them engage in contingent deferred swap and add-on transactions from 1999 through 2001, according to the complaint. At the time, EY was separately also employed as Sprint’s public accountant.

The former Sprint executives claim the IRS helped EY disguise the seriousness of an investigation into the shelters by striking the word “penalty” from language in a press release describing a civil settlement in 2003. The IRS did so in exchange for an extra $1.4 million included in the $15 million accord to “sweeten the deal,” according to the complaint.

Not until a decade later did the full extent of EY’s knowledge of the probe come to light, according to the complaint. In February 2013, Manhattan federal prosecutors reached a $123 million settlement with EY to resolve the criminal probe. The following month, prosecutors issued an announcement “touting EY’s cooperation with the government investigation into the tax shelters since approximately 2003,” the executives alleged.

The case is Esrey v. U.S.A., 1:16-cv-03019, U.S. District Court, Southern District of New York (Manhattan).