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DEBUNKING THE 'OPIS' SHELTER

July 27, 2005

Thanks to the TaxProf, a great Tax Analysts article on the KPMG FLIP/OPIS tax shelters is now available free to non-subscribers. The article, "Tales from the KPMG Skunk Works: the Basis-Shift or Defective-Redemption Shelter," looks under the hood of this widely-marketed shelter and finds it wanting:

KPMG seems to have lost its internal compass as what was fair game to do to our country. By February 1998, FLIP/OPIS had been subjected to scathing internal criticism at KPMG. KPMG counsel internally criticized the KPMG opinion as not handling the argument that the FLIP loss was a sham: "No further attempt has been made to quantify why IRC § 165 should not apply to deny the loss. Instead, the argument is again made that because the law is uncertain, we win."97 Indeed, KPMG has no defense against the argument that the loss was a sham and yet KPMG went forward with the opinions for FLIP without disclosing its internal criticisms. In a closely related shelter, KPMG's question internally was whether it was receiving enough fees and internally its judgment was that the fees were high enough to assume what would be a huge risk.

The article includes exerpts from internal KPMG memos debating the shelter, as well as a technical explanation of how the shelter is supposed to work, but doesn't.

KPMG is now apparently under threat of indictment for its tax shelter promotions. If that happens, whatever money they made on tax shelters isn't enough.

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