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August 08, 2005

The Wall Street Journal reports today that former KPMG tax-shelter client has filed a lawsuit seeking class action status against KPMG (link only works for WSJ online subscribers).

The complaint, filed last week in a federal District Court in New York, centers on a shelter that KPMG sold under the name S-Corporation Charitable Contribution Strategy, or SC2. The Internal Revenue Service in April 2004 declared SC2 to be an abusive tax-avoidance scheme. The shelter was one of four KPMG tax shelters that were criticized by the Senate Permanent Subcommittee on Investigations in public hearings in November 2003.

From 2000 to 2001, KPMG sold SC2 to 58 closely held corporations, according to a report by the subcommittee, generating $28 million in fees for the accounting firm. The shelter was one of the firm's 10 best sellers at the time, the report said.

The SC2 shelter was designed to allocate taxable income to tax-exempt entities that would later be harvested by the tax-shelter investor tax-free - and with a charitable deduction, to boot. It's described in more detail here.

As unwelcome as this suit is to KPMG, they have more serious problems. Perhaps they are starting to regret their big push into tax shelters during the 1990s.

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