Tax Update Blog: Tax Shelter News Archives
TOUR DE FORBES
May 20, 2008
Janet Novack has two pieces in the new issue of Forbes that deserve careful reading.
Read My Lips discusses the Presdiential candidate tax positions:
As president, Senator John McCain (R–Ariz.) aims to balance the budget while extending the Bush-era income tax cuts, doubling the personal exemption and eliminating the alternative minimum tax. The Democratic candidates say they’ll raise taxes only on the well-off—those making over $200,000 for Senator Barack Obama (D–Ill.) and $250,000 for Senator Hillary Clinton (D–N.Y.)—while showering tax breaks and health insurance on working families. (At press time Clinton is still hanging in.)Anyone who believes any of this likely already owns Florida swampland.
The article also has thoughts on how to plan your investments around likely tax policy changes in the next administration.
Tax Shelters 2.0 tells how the IRS tax shelter crackdown has gotten the national accounting firms out of the retail tax shelter market, opening the door to smaller operaters, often using twists on the same old discredited schemes. Buyer beware.
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
WEB SITES FOR SALE: THE MORE YOU PAY, THE MORE YOU DEDUCT?
May 15, 2008
The retail cattle feeding tax shelters of the 1970s used a simple scheme to generate deductions: Sell a cow worth $500 for $5,000 (heck, $10,000 - who cares?) to the tax shelter - but accept a non-recourse note from the shelter as payment. The shelter would then depreciate the $10,000 "cost" of the the cow, but with no intention of ever paying off the note.
Now comes word from Virginia of a new economy twist on this old scheme involving Virginia CPA John T. Hoang:
The complaint alleged that Hoang, through his company Tax Smart Technology Services, sold customers Web sites worth almost nothing. But the sales contracts between Tax Smart and customers falsely stated that the Web sites were worth tens of thousands, hundreds of thousands or even millions of dollars. Hoang then allegedly prepared customers’ federal income tax returns, improperly using the false values to claim large depreciation deductions. The lawsuit asserts that Hoang used offsetting sham promissory notes to create the appearance of sales of valuable assets, while in reality customers paid Hoang a small sum and Hoang then provided customers a worthless Web site and a large tax deduction. The government complaint estimates that the harm from Hoang’s misconduct exceeds $6.1 million.
Mr. Hoang has now consented to a permanent injunction barring him from preparing returns or promoting this scheme.
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
4TH CIRCUIT REJECTS LILO APPEAL
April 30, 2008
After a defeat in a "Son of Boss" tax shelter case last week in a federal district court, the IRS bounced back yesterday with an appeals court victory. The Fourth Circuit upheld a 2007 decision defeating a "Lease-in Lease-out" shelter. From the opinion:
In closing, we are reminded of "Abe Lincoln’s riddle . . . 'How many legs does a dog have if you call a tail a leg?'" Rogers v. United States, 281 F.3d 1108, 1118 (10th Cir. 2002). "The answer is ‘four,’ because ‘calling a tail a leg does not make it one.’" Id. Here, BB&T styled the LILO as a lease financed by a loan, but did not in substance acquire a genuine leasehold interest or incur genuine indebtedness. Accordingly, although we decline to resolve whether the transaction as a whole lacks economic substance — that is, whether it has "reached the point where the tax tail began to wag the dog," Hines, 912 F.2d at 741, we conclude that the Government was entitled to recognize that tail for what it was, not what BB&T professed it to be.
The IRS has occasionally lost cases against the mass-marketed tax shelters of the late 1990s at the district court level, but I think they have won all of their cases at the more important appellate level.
Links:
TaxProf Blog
Prior Tax Update BB&T coverage
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
A BAD DAY FOR LILO
April 22, 2008
A Cincinnati jury didn't buy the LILO tax shelter. The jury ruled Friday that Fifth Third Bancorporation wasn't entitled to deductions arising from a sale-leaseback of rail cars in the foreign countries of France, Germany and Massachusetts.* A Justice department press release said that this was "the first large, complex corporate tax shelter case tried by a jury."
More from the press release:
"The success in this case is due to the great teamwork by lawyers from both the Justice Department's Tax Division and our IRS Office of Chief Counsel," said IRS Chief Counsel Don Korb. "This is just the beginning of the enhanced collaboration between the Tax Division and the Office of Chief Counsel in litigating cases. This enhanced collaboration will be more and more evident in the coming months, and will, I believe, significantly increase the government's effectiveness in combating tax sheltering activity like the LILOs at issue in this case."
Given that the verdict disallowed $5.6 million in tax refunds, an appeal by Fifth Third wouldn't be surprising.
The TaxProf has more.
*Yes, technically speaking, Massachusetts isn't a foreign country, even though it is much too hard to spell.
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
IRS DEFEATS 'MIDCO' TAX SHELTER
April 02, 2008
When a C corporation sells its business, there is typically a little tug of war between the buyer and seller.
The seller wants to sell his stock because he will be taxed twice if he sells the assets -- first on the gain on the assets themselves, and again when he liquidates the corporation.
The buyer, in contrast, wants to buy assets. The buyer doesn't want to take on any unknown liabilities of the old corporation, but he also wants to recover his purchase price through depreciation and amortization. The cost of stock isn't recoverable until it is sold.
A tax shelter launched in the 1990s tax shelter frenzy sought to give both sides what they want. The "Midco" shelters would set up a tax-indifferent middleman to buy the stock -- giving the seller his sought-after stock sale -- and then sell the assets to the buyer. The IRS won a court battle against this shelter in a U.S. District Court in Houston yesterday; the court upheld the IRS position on summary judgement.
Accounting firm PriceWaterhouse Coopers (PWC) arranged for a tax-indifferent "Midco" named "K-Pipe" to buy the stock of Bishop Group Ltd. and sell the assets to Midcoast Energy Resources. The judge disregarded the midco and said the transaction was a stock sale:
Moreover, there is no objective evidence in the record that K-Pipe negotiated the stock sale at all. All of the communications involved Midcoast, and it was at the insistence of Midcoast's tax advisors that certain actions be undertaken, such as the agreement not to liquidate Bishop for two years and the formation of the Butcher Interest Partnership to add "good facts" to the transaction. Additionally, K-Pipe's obligations were almost entirely indemnified by Midcoast through various side agreements and under the Stock and Asset Purchase Agreements. It was Midcoast's loan that acted as security for the $195 million, which K-Pipe borrowed. K-Pipe, having been created for the purposes of this transaction, could not have provided any assets as security. After the transaction, K-Pipe engaged in virtually no business activity and was, in substance, a mere shell. Finally, K-Pipe's sole purpose in participating in the transaction was to allow Midcoast to step up the basis of the Bishop Assets. Under the facts of this case, the court finds that K-Pipe's role in the transaction should be disregarded.
Another blow to the big-firm tax shelter industry.
Cite: Engbridge Energy Company, Inc. v. U.S., No. 4:06-cv-00657 (DC-SD Texas)
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
EX-KPMG PARTNER FACES NEW TAX SHELTER CHARGES
March 20, 2008
One of the defendants still facing criminal charges relating to KPMG's tax shelter business was hit with a new round of criminal charges yesterday. Robert Pfaff faces new charges of setting up fraudulent shelters in the Northern Marianas islands. The charges also allege that he hid his fees for the transactions from both the IRS and his own accounting firm, KPMG.
The TaxProf has a roundup.
Link • KPMG ~ • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
FOOL'S GOLD AND CHICKEN SHELTER
February 22, 2008
The tax authorities may move slowly to shut down tax scams, but when they do move, it can be impressive. The Justice Department moved to shut down two tax-shelter organizers yesterday for what appear to be pretty brazen abusive tax shelters.
There's gold in them there football players
The New York Times reports on one of these schemes, a bogus gold-mine tax shelter:
The Justice Department filed two lawsuits on Thursday in a move against what it said was a fraudulent gold-mining scheme sold to dozens of wealthy investors, including seven current or former National Football League players.Prosecutors say the promoters of the investment, known as Midas, for mining interest development action strategy, promised investors a return of at least 34 percent if they invested refunds they got after filing amended tax returns that claimed bogus deductions related to supposed gold-mining expenses in Colorado, Arizona and elsewhere.
Sure, just about every NFL player has been to college, but not many of them were finance or accounting majors.
Liquid Eggs
The other tax-shelter action yesterday went after two former Grant Thornton partners who apparently were run out of that national accounting firm and went into the tax-shelter business on their own in the Kansas City area. One of them became known by the not-very-manly nickname "Dr. Poof" for his alleged ability to make taxes "go poof." The Kansas City Star reports:
Two area tax advisers used sham companies and nonexistent chicken farms to shelter their clients’ income from hundreds of millions in taxes, government lawyers alleged Thursday.In separate but related civil suits filed in federal court, the IRS said that Allen R. Davison of Overland Park and A. Blair Stover Jr. of Platte City and Beverly Hills, Calif., sold numerous fraudulent tax-avoidance schemes to wealthy investors. The agency’s lawyers asked a federal judge in Kansas City to permanently bar the men from giving tax advice or representing clients before the IRS.
The federal complaint alleges that the promoters used a menu of scams, including:
-Claiming disabled-access tax credits without actually incurring any expenses for improving disabled access.
- Deducting bogus "management fees" to Roth IRA-owned corporations.
- Inflating depreciation deductions through bogus asset basis.
The most picturesque item in their alleged toolkit is phoney chicken farms. The complaint says that non-farmers - say, insurance brokers - would write a big check at year-end to allegedly buy a flock of layers, and a tax deduction Cash-basis "dirty boots" farmers can do this, but an insurance broker in Mission Hills probably isn't spending much time on the chicken farm. The insurance broker-farmer would get the check back the following year, including it in income, and then write a bigger check the subsequent December to keep the deduction going.
The Kansas City Star report quotes one participant:
“I just think somebody doesn’t have their facts here,” she said. “Because I know that some of the investments that Al is in, and has involved other people in, are in chicken farming and they have literal chicken farms that produce liquid eggs for McDonald’s. I know about the business and it’s extremely legitimate.”
Liquid eggs? I bet they don't hard-boil very well.
Links to Justice Department Press Releases:
TAX PREPARERS FROM WASHINGTON, D.C. & TEXAS SUED FOR ALLEGEDLY PROMOTING GOLD MINING TAX SCAM
The linked items also have links to the actual complaints filed in federal court.
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
SEVENTH CIRCUIT UPHOLDS RETROACTIVE 'SON OF BOSS' REGS
February 07, 2008
The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the "Son of Boss" tax shelter. The TaxProf reports:
The opening of Judge Easterbrook's unanimous opinion foreshadowed the result:Paul M. Daugerdas, a tax lawyer whose opinion letters while at Jenkins & Gilchrist led to the firm’s demise (it had to pay more than $75 million in penalties on account of his work), designed a tax shelter for himself, with one client owning a 37% share.The Seventh Circuit described the tax shelter this way:
A transaction with an out-of-pocket cost of $6,000 and no risk beyond that expense, while generating a tax loss of $3.6 million, is the sort of thing that the IRS frowns on. The deal as a whole seems to lack economic substance; if it has any substance (a few thousand dollars paid to purchase a slight chance of a big payoff) then the $3.6 million “gain” on one premium should be paired with the $3.6 million “loss” on the other; and at all events the deal’s nature ($36,000 paid for a slim chance to receive $7.2 million) is not accurately reflected by treating Euro 56,000 as having a basis of $3.6 million.
We blogged the district court decision here.
Mr. Daugerdas hobnobs with Howie Mandel in happier times:
Cite: Cemco Investsors, LLC v. Forest Chartered Holdings, Ltd, No. 07-2220 (7th Cir. 2/7/08).
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
BROKEN JADE
December 27, 2007
The IRS has won an across-the-board victory in the U.S. Court of Claims over the "Son of Boss" tax shelter.
The case involved three Texans who together had $40 million in capital gains on which they didn't care to pay taxes. They each bought bought a Euro option for $15,000,020 and sold an offsetting option for $14,850,018 - a spread of $150,002. Any increase in the value of one option was almost perfectly offset by a decline in the value of the other option, so there was only $150,002 really at stake, and that was all the each of the Three Texans were out-of-pocket. Well, that and $900,000 in fees to the promoters and facilitators of the shelter.
The partners contributed the offsetting positions to Jade Trading LLC, which was treated as a partnership under federal tax rules. They claimed a basis of $15,000,020 basis in each partnership interest, relying on a technical reading of the tax law that ignored their "contingent" liability for the $14,850,018 option they wrote. They then sold their partnership interests for their $150,000 fair market value, claiming the $14,850,000 difference as a capital loss.
The Court of Federal Claims struck down the transaction under what you might call the "too good to be true doctrine." The court said there was no "economic substance" to the deal, so the tax law does not have to respect its formalities:
A final indicium of the lack of economic substance here, while not dispositive in and of itself, is the highly disproportionate tax advantage to the underlying monetary outlay -- the tax loss per brother, $14.9 million, was roughly 65 times greater than each LLC's $225,002 financial commitment to Jade, almost 100 times each LLC's $150,002 investment in the spread transaction which generated the loss, and approximately 100 times the $140,000 potential net profit each LLC could have earned.In sum, this transaction's fictional loss, inability to realize a profit, lack of investment character, meaningless inclusion in a partnership, and disproportionate tax advantage as compared to the amount invested and potential return, compel a conclusion that the spread transaction objectively lacked economic substance.
The court disallowed the deduction and upheld a 40% "gross valuation misstatement penalty," making the transaction a bad deal all around for the participants.
The shelter at issue in Jade Trading was the brainchild of accounting firm BDO Seidman's "TAX $ELLS!" division, "known internally as the 'Wolf Pack.'" Other national firms sold similar shelters, including those that triggered the KPMG criminal prosecutions. Defenders of the promoters used to say that "these shelters haven't been ruled illegal." Not any more.
The TaxProf has more, including a link to the opinion.
Other coverage:
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
NEW E&Y TAX SHELTER CHARGES?
September 12, 2007
Fresh from winning a guilty plea in their tax shelter case involving former KPMG partners, the Justice Department is revving up a case involving another national accounting firm, reports the New York Times:
Federal prosecutors are planning a fresh indictment in a case that involves tax shelters sold by the accounting firm Ernst & Young, according to defense lawyers in the case.
Four current and former partners of Ernst & Young were indicted last May in connection with their tax shelter work from 1998 through 2004. The firm itself, which has not been charged, has been under investigation since 2004 by federal prosecutors in Manhattan, who have been looking into its creation and sale of aggressive shelters.
Nobody expects charges against E&Y, but that can't be much comfort to those involved in tax shelter frenzy that ran from the late 1990s until around 2003. The Times provides some background:
The case against the four Ernst & Young defendants focuses on four aggressive shelters known as Cobra, Pico, CDS and CDS Add-on. Several firms other than Ernst & Young, including Deutsche Bank and the law firm of Jenkens & Gilchrist, which is now defunct, also worked on Cobra. Deutsche Bank, which is part of the broad criminal investigation, helped make and sell Cobra to more than 1,100 wealthy investors in 1999 and 2000, according to court papers in related cases.
While the tax shelter party was incredibly lucrative for the big firms at the time, the hangover is nasty.
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
GUILTY PLEA BOOSTS KPMG CASE PROSECUTION
September 11, 2007
A few weeks ago, the high-profile tax shelter prosecution of former KPMG seemed on the verge of collapse. A guilty plea may give it new life. From today's New York Times:
The governments criminal case against promoters of questionable tax shelters took a step forward yesterday when an investment adviser at the center of the inquiry pleaded guilty and provided new details on those involved.
The plea by David Amir Makov, 41, in Federal District Court in Manhattan is expected to bolster the governments investigation of Deutsche Bank over its work with questionable shelters, including one known as Blips, whose workings Mr. Makov described in detail yesterday.
The work must have been profitable; Mr. Makov agreed to pay a $10 million fine. His plea may help prosecutors argue that the shelters were not agressive tax planning, but mere shams. He explained the "BLIPS" tax shelter, versions of which were marketed by KPMG and others. The shelter is reported to have generated over $5 billion in false tax losses. From the Times report:
Although Blips were created on paper to look like seven-year investments, it had neither real loans nor a real investment component, Mr. Makov explained yesterday. "There was no economic substance," he said. "Instead, we created the appearance of economic substance, rather than the reality." Mr. Makov added that he was "clearly told by Bank A, KPMG and others that the loan was not at risk."
While he initially thought that Blips were legitimate, he said that "as part of the deception" he was eventually "asked by representatives of Bank A," among others, "to come up with an investment rationale."
How's this for a rationale: "to generate $10 million to pay my criminal fines."
Link • KPMG ~ • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
JUDGE DROPS CHARGES AGAINST 13 KPMG DEFENDANTS
July 16, 2007
When you're thrown off the sled, usually the wolves get you. Thirteen former KPMG partners and employees cheated the wolves today.
The trial judge in the KPMG tax shelter criminal case dismissed the charges agains the 13 defendants who were affected when KPMG agreed not to pay for their legal defense to keep the firm itself from being indicted.
The case agains three other ex-KPMG employees and two non-KPMG defendants in the case will proceed to trial.
The TaxProf has a full roundup.
Link: Complete Tax Update coverage.
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
INSIDE THE KPMG NEGOTIATIONS
July 06, 2007
The New York Times today describes notes taken by a defense attorney during the tense negotions between international accounting firm KPMG and the Justice Department when the firm was on the verge of being indicted:
Now Mr. Barloons notes of meetings from March through June 2005, which were made public in June in connection with the related criminal trial of 16 former KPMG tax employees, provide a rare and detailed look inside the closed-door process of those dealings.
We almost never get a front-row seat to a negotiation between a major multinational company and the United States government, said Stephanie Martz, director of the White Collar Crime Project.
An indictment would probably have brought down KPMG. The notes seem to show that the government made KPMG throw some of its partners off the sled to hold off the wolves:
Rod Rosenstein, the deputy assistant attorney general, who was at the meeting, asked whether the Justice Department was setting a precedent that we cant prosecute somebody if they come and clean everything up.
But earlier in the meeting, [defense attorney] Mr. Bennett said that what was really precedent-setting about the case was the conditioning of the payment of [partner and employee] legal fees on cooperation. We said wed pressure although we didnt use that word our employees to cooperate.
This denial of legal fees for employees is at the heart of efforts to have the criminal charges against former KPMG partners and employees dismissed. The trial judge is considering the issue.
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
KPMG CHARGES TO BE THROWN OUT?
June 01, 2007
The judge hearing the criminal case involving ex-KPMG employees will hold a hearing on whether to throw out the charges. The judge is considering dismissal on the grounds of prosecutorial misconduct. The White Collar Crime Prof Blog discusses the details. The TaxProf and the Tax Girl have more.
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
NYT: INDICTMENTS LOOM FOR E&Y TAX SHELTER FIGURES
May 30, 2007
The New York Times reports:
Federal prosecutors have decided not to bring criminal charges against the accounting firm of Ernst & Young over its work with questionable tax shelters, but will instead bring criminal charges against four employees today, people close to the case said.
The Ernst & Young employees to be charged by federal prosecutors for the Southern District of New York are Robert Coplan, Richard Shapiro, Martin Nussbaum and Brian Vaughn, according to these people.
The prosecutors seem to be taking a more low-key approach here than they did with their indictment of 17 people, mostly former partners and employees of KPMG, coupled with a "deferred prosecution agreement" that made major changes to the KPMG tax practice. The KPMG case has run into trouble, with the presiding judge unhappy with prosecution tactics. Perhaps the Justice Department's more subdued approach to the E&Y case is a result of their problems in the KPMG matter.
UPDATE: Indictments announced.
UPDATE II: The TaxProf has a link roundup.
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
THIS DEAL NEEDED MORE KETCHUP
May 29, 2007
Last week the H.J. Heinz Company lost a big "basis shifting" tax shelter case.
The shelter was supposed to work like this:
1. A Heinz subsidiary, Heinz Credit Corporation, bought 3.5 million shares of Heinz stock on the public markets for about $129 million.
2. Heinz redeemed all but 175,000 of the shares in a transaction that (on purpose) did not qualify as a redemption under Sec. 302. That means the transaction is a dividend, and the $120+ million basis in the 3,325,000 shares shifts to the remaining 175,000 shares.
3. The subsidiary sells the remaining 175,000 shares on the public market, generating a $124 million capital loss and more than $40 million in tax refunds.
These basis-shifting transactions were designed to take advantage of an old tax law provision meant to keep people from disguising corporate dividends as stock sale proceeds. This was more important before dividends and capital gains were taxed at the same rate, but it still matters; a dividend is 100% taxable, while a stock sale is taxable only to the extent the proceeds exceed your stock cost ("basis").
While the redemption rules can be complicated, a simple example gives an idea how it works:
If you own all 100 shares of a corporation, a sale of 99 shares back to the corporation still leaves you with 100% ownership, so the tax law ignores the "sale" and treats the transaction as a dividend. The basis of the 99 shares "sold" is reallocated to the remaining 1 share in such a "failed" stock redemption.
The basis-shifting shelters sought to create losses by using "failed" redemptions to inflate the basis of shares and then selling them to outside parties at a loss.
The Court of Federal Claims said that the Heinz basis-shift was a "sham":
This court will not don blinders to the realities of the transaction before it. Stripped of its veneer, the acquisition by HCC of the Heinz stock had one purpose, and one purpose alone -- producing capital losses that could be carried back to wipe out prior capital gains. There was no other genuine business purpose. As such, under the prevailing standard, the transaction in question must be viewed as a sham -- a transaction imbued with no significant tax-independent considerations, but rather characterized, at least in terms of HCC's participation, solely by tax-avoidance features. The tax advantage sought by Heinz via this sham must be denied.
The moral? If you do a deal solely to generate tax losses, the courts might not buy it, no matter how much ketchup you pour on it.
Cite: H.J. Heinz vs. United States, Ct. Fed. Cl. No. 03-2847T
Link • Tax Shelter News • Comments (2) Bookmark: del.icio.us • Digg • reddit
SIDLEY SETTLES; KPMG AVOIDS TRIAL ON FEES
May 24, 2007
Yesterday saw two developments in the ongoing tax shelter court battles. Legal giant Sidley & Austin settled charges of promoting bad tax shelters by agreeing to pay a $39.4 million penalty; in return, the government agreed to not pursue criminal charges. The case arose from tax shelter opinions written by Richard Ruble, one of the defendants in the case of the former KPMG partners. Mr. Ruble joined Sidley & Austin when it bought the Brown & Wood law firm.
Meanwhile, KPMG avoided a separate trial on whether it would have to pay the legal fees of its indicted former partners. The Second Circuit Court of Appeals ruled that the trial court judge was out of bounds when it ordered the trial on fees. The fee issue will now be settled in arbitration.
The TaxProf Blog rounds up both stories:
TaxProf Sidley coverage
Tax Prof KPMG coverage
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
JENKENS AND GILCHRIST FUN FACTS
March 31, 2007
Amount paid by the fatally-wounded Jenkens and Gilchrist law firm as a penalty to the government for its tax shelter activities: $76 million.
Compensation reportedly ($link) paid from 1999 to 2003 to Paul Daugerdas, head of the Jenkens and Gilchrist tax shelter practice: $93 million.
More on the fall of Jenkens here.
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
TAX SHELTER PENALTIES BRING DOWN JENKENS AND GILCHRIST
March 29, 2007
Jenkens and Gilchrist rode the 1990s tax shelter boom to great wealth. Today they rode it back to earth.
The firm today agreed to pay $76 million in penalties to the IRS for its tax shelter activities - penalties that doom the firm. From a Department of Justice press release:
The firm has acknowledged not only that its tax shelter practice was fraudulent and caused serious harm to the United States Treasury, but also that the practice caused such harm to the firms reputation and revenues that it cannot survive as a going concern. The demise of Jenkens & Gilchrist demonstrates that a lucrative but fraudulent tax shelter practice may provide short-term financial rewards, but at a great long-term cost."
Wow. What a way to go out. While this will put a lot of Jenkens and Gilchrist attorneys on the street, the recriminations promise employment to other lawyers for years to come.
Paul Daugerdas, pictured above, was one of the Jenkens attorneys in the tax shelter practice; we blogged about one of his shelters earlier today. He probably isn't the most popular guy around the office right now.
The TaxProf has coverage and a full set of links.
Link • Tax Shelter News • Comments (1) Bookmark: del.icio.us • Digg • reddit
IRS WINS CASE IN HEAVILY-MARKETED TAX SHELTER
March 29, 2007
The IRS won a "summary judgment" ruling on a version of the "BLIPS" tax shelter in a Chicago Federal courtroom yesterday. A district court judge ruled that the shelter, which involved inflating the basis of a partnership through a purchase of offsetting foreign currency contracts, didn't work. The judge discussed the procedural defense of the shelter ("Cemco") with a statement that could apply to many of the big-firm tax shelters of the late '90s:
As detailed below, Cemcos theory consists of several nuanced procedural steps. Ultimately, however, the argument amounts to little more than a house of cards, for if any of the steps fail (and several do), Cemcos entire position collapses.
The case has additional resonance because a version of this shelter is involved in the KPMG criminal litigation. This complete defeat for the shelter (including valuation penalties) may help support the prosecution's view of the shelters. This particular shelter, though, was the progeny of Paul Daugerdas, a Jenkens and Gilchrist tax attorney pictured here in happier times with Howie Mandel:
Jenkins and Gilchrist attorney with Howie Mandel at a charity ball. No deal, says the judge.
.
Cite: Cemco Investors, LLC v. United States, DC-Ill Case No. C 8211 (link courtesy of the TaxProf).
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
KPMG CRISIS RECALLED IN WALL STREET JOURNAL
February 15, 2007
The Wall Street Journal has a page-1 piece today on accounting giant KPMG's near-death experience. It tells how Timothy Flynn took the reins of the firm when the former chairman stepped down after being diagnosed with a fatal brain tumor. Only three days later, Mr. Flynn was in conference with the Justice Department trying to keep the firm from being indicted for its tax-shelter dealings.
It's an interesting account of how KPMG narrowly avoided being put out of business by its tax shelter products. It certainly is a different firm than it was in 2005.
Link • KPMG ~ • Tax Shelter News • Comments (2) Bookmark: del.icio.us • Digg • reddit
ANOTHER SHELTER LOSES IN COURT
February 02, 2007
A marketed tax shelter failed a court test in Texas this week. The New York Times reports:
The shelter, known as Blips, plays a central role in the criminal inquiry of Deutsche Bank over questionable tax shelters and in the pending criminal trial in federal court in Manhattan of 16 former employees of the accounting firm KPMG and two outsiders.
The civil ruling on Tuesday by Judge T. John Ward of Federal District Court for the Eastern District of Texas will probably add ammunition to Manhattan prosecutors arguments that Deutsche Bank acted improperly by providing fake loans for Blips and similar shelters. Judge Wares is the first major civil ruling on the legitimacy of Blips, or bond-linked issue premium structure.
The opinion says that much of the transaction documentation was a facade, meant to legitimize the shelter by outlining planned events that in real life were never meant to happen.
Interestingly, the U.S. District Court declined to assess penalties on the taxpayers, saying they reasonably relied on their tax advisors and the shelter opinions.
Link:
Cite: Klamath Strategic Investment Fund, LLC No 5:04-CV-278
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
LILO FAILS
January 05, 2007
The IRS won another courtroom victory in the tax shelter wars yesterday. A federal judge in North Carolina ruled on summary judgement that a LILO (lease-in lease-out) tax shelter had no substance and could be disregarded.
BB&T Corporation set up a "lease" with Sodra, a Swedish paper manufacturer, where it leased Sodra's manufacturing equipment on a 36-year lease. It "borrowed" $68 million from a subsidiary of Dutch Bank ABN-AMBRO and paid $18 million of its own money. All of this money went into BB&T's ABN bank account.
$68 million then went from the ABN account to "lease" the equipment from Sodra, who then leased it right back from BB&T. Sondra had to pay the $68 million right back to ABN as part of the deal. Over the term of the "lease," Sodra's rent payments to BB&T equalled BB&T's debt payments to ABN, and the debt was non-recourse to BB&T.
The tax angle was the interest deduction purportedly generated by the $68 million "loan." The court said it didn't work:
When the intermediate payment steps are disregarded, which must be done in order to consider the substance of the loan transaction and not the form selected by the parties, it becomes clear that the loan transaction is only a circular transfer of funds in which the HBU loan is paid from the proceeds of the loan itself. There was no money lent to BB&T in a substantive sense, and the HBU loan does not reflect genuine indebtedness
No debt, no interest; no interest, no deduction.
Cite: BB&T Corp. v. United States, No. 1:04CV00941 (M.D. NC 1/4/06)
Links: TaxProf coverage
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
SHEPPARD: PROSECUTION OVERREACHED ON KPMG PARTNER INDICTMENTS
August 01, 2006
Lee Sheppard has an important piece in Tax Analysts today ($link) where she finds the prosecution case in the KPMG partner indictments wanting. She concludes:
What we may have here is another Martha Stewart case if the government loses a civil case on the underlying shelter. That is, we could have charges of conspiracy to defraud the United States by means of obstruction and false statements sustained against the Stein defendants even though there was no underlying crime. Judge Kaplan should dismiss the tax evasion charges in the superseding indictment, if not the whole thing.
Ms. Sheppard isn't known for sympathy with shelter promoters. It's a bad sign for the prosecution if they have lost her. If you have a subscription to Tax Analysts, the piece is worth the read.
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
JUDGE: KPMG PROSECUTORS ACTED UNCONSTITUTIONALLY, BUT CHARGES AREN'T DROPPED
June 27, 2006
A U.S. Judge helped out the finances of the indicted former KPMG partners by opening the door for the international accounting firm to pay the parters' legal fees -- and then vigorously motioning the firm through that door. The judge declined to drop the charges, however. The Wall Street Journal reports ($link):
A federal judge in Manhattan found that government prosecutors violated the constitutional rights of 16 former KPMG LLP executives facing criminal charges for allegedly marketing fraudulent tax shelters by pressuring the firm to cut off their legal fees.
But U.S. District Judge Lewis A. Kaplan declined to dismiss the indictment against the former KPMG employees, saying they could file civil claims against the accounting firm to have the fees paid. He also suggested that KPMG could agree to advance the fees, and said the government could use its "leverage" to get the firm to pay the legal fees beyond its $400,000 cap.
In case somebody didn't get the hint:
Judge Kaplan left open the possibility the court could take further action if the fee issue isn't resolved. "The court declines to consider additional relief at this time, although it may do so in the future if KPMG does not, for one reason or another, advance defense costs," he wrote
The fees for the defense have to be enormous, so this must be a great relief to the defendants and their families. Given that long prison sentences are still a possiblity if the charges ultimately stick, the defendants can be excused if they aren't too happy just yet. Of course, being able to pay your lawyers can't hurt them on that score.
The TaxProf has a roundup.
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
IRS WINS 'SON OF BOSS' TAX COURT SUMMARY JUDGMENT
April 22, 2006
Defenders of the tax-shelter practices of the 1990s like to say that "the courts haven't found them illegal." That's a bit less true now, according to the weekened Wall Street Journal today ($ link). The paper reports that the tax court this week ruled a Son of Boss partnership out of Omaha didn't work:
Tax Court Judge David Laro, in Washington, D.C., in an opinion not yet released, granted the IRS summary judgment earlier this week in its case against now-defunct RJT Investments X LLC, which was based in Omaha, Neb. The IRS argued that RJT used scam accounting to create large losses in order to slash its federal taxes.
In 2004, the IRS settled out of court with about 1,200 businesses and collected $3.8 billion in taxes due, interest and penalties that were less than the maximum allowed by the law. At the time, the IRS warned 600 other taxpayers that had taken advantage of the shelter that if they didn't come forward and settle, the IRS would disallow all the tax benefits and assess the full 40% penalty that the law allows.
"The RJT Investments case is the first concrete manifestation of the fruits of that commitment," said IRS Commissioner Mark Everson in a statement. ""We will continue to fight these cases as long as we have to."
The "not ruled illegal" argument has always been disingenous, given that it takes years for tax shelter cases to come to trial.
As the decision hasn't yet been released, it's hard to tell how much impact the RJT case will have. According to the journal, "In the RJT case, RJT didn't challenge the IRS on the merits of the case. Instead RJT defended the case on a jurisdictional issue, which the judge rejected."
The Omaha locatiion of this shelter may mean that our Eighth Circuit will be a key player in the tax shelter wars on appeal. The WSJ cites an RJT attorney as saying an appeal is in the works.
Tax Analysts has more on its free site here.
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
INDICTED EX-PARTER FLIPS IN TAX SHELTER CASE
March 27, 2006
David Rivkin, one of the 19 individuals indicted in the KPMG tax shelter case, entered a guilty plea today and agreed to cooperate with prosecutors:
Rivkin admitted that he conspired with others between January 1999 and May 2004 to prepare and execute false documents so that clients could file false tax returns.He also admitted that he took steps to conceal the existence of fraudulent tax shelters from the Internal Revenue Service and avoided registering the shelters with the IRS by claiming attorney-client privileges.
In pleading guilty to conspiracy and tax evasion, Rivkin signed an agreement to cooperate with prosecutors, who could then ask the judge to consider giving Rivkin a more lenient sentence rather than the years he might face in prison. Sentencing was set for Feb. 9, 2007.
This is the first crack in the solid front of resistance of those indicted in the case. Expect the remaining defendants to say that the guilty plea was the result of irrisistable pressure by the prosecution.
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
TAX SHELTER CASE NOT JUST ABOUT TAX PLANNING
March 07, 2006
Tax shelter promoters who are facing criminal chargers, and their defenders, like to repeat that none of the shelters have been found illegal in court. The recent New York Times report about Deutsche Bank, which implied that many of the essential transactions in their shelters may have never happened, hinted at why the government decided that the activities of KPMG shelters went beyond aggressive tax planning and became criminal.
The defendants recently moved to dismiss the indictments. In their reply brief to the dimissal request, the prosecutors confirm that their case goes far beyond challenging the tax theories supporting the shelters. They say that many of the transactions that underlie the shelters - transations that even shelter fans would admit are necessary to achieve the desired results -- never took place. Instead, according to the prosecution, phony documents were generated for imaginary transactions, and the shelters relied on less on tax theory than on hiding the ball and hoping the IRS wouldn't notice. The reply brief lays out the basic accusations:
The obvious point of this phony documentation was to convince clients to claim these massive phony tax losses and provide a script and props for misrepresenting the transaction and deceiving the IRS if and when the clients were audited. The defendants used various additional furtive means to conceal or obscure the transactions, such as by: (i) deciding, for business reasons, to refrain from registering the transactions as tax shelters because the penalties for not registering them paled in comparison to the fees they stood to collect from selling unregistered (and therefore unknown to the IRS) tax shelters; (ii) completely omitting income or gain and shelter losses from the clients' individual income tax returns; (iii) splitting up massive phony losses and sprinkling them throughout a schedule to the return in hopes of tricking the IRS into thinking that the losses were created by various different investment transactions; and (iv) using phony attorney-client relationships in order to conceal the facts. If the IRS, despite these fraudulent efforts, nevertheless discovered the shelter in the course of an audit, then the plan, the Indictment alleges, was that the clients would provide the phony documentation to further defraud the IRS and conceal the true facts so that the clients could keep for themselves money the clients should have paid in taxes. If the IRS nevertheless disallowed the phony losses, the plan (it is charged (Indictment 27) was to reveal the false opinion letters to the IRS and claim that no penalties should be assessed on the grounds that the clients relied on the opinion letters.
The government has a long way to go before this is proven in court, of course. Still, these new details about the prosecution of the former KPMG partners are reassuring to tax practitioners, in a perverse way. These assertions aren't about making aggressive tax planning criminal; it's about prosecuting actions that, if they happened, were blatantly fraudulent. Fake transactions and phony documents have always been fraud, and prosecuting tax shelter promoters for fake documentation is no more a threat to ordinary tax practice than the prosecution of Irwin Schiff.
Links:
roundup of coverage TaxProf roundup of recent developments in the case.
Prosecution reply brief (large pdf file; if you get an Adobe Acrobat Reader error message, you can view the document by changing your acrobat preferences - Edit, Preferences, Internet, then uncheck "allow fast web view").
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
DEUTSCHE BANK: PRETENDING TO PRETEND?
February 24, 2006
Many tax shelter transactions in the 1990s depended on a certain suspension of disbelief. Taxpayers would weave an elaborate web of deals and entities to, say, move income offshore or generate artificial losses, and then try to say with a straight face that this stuff happens all the time, and they just needed an offshore partner in the Netherlands and the Caymans to borrow money just the right way. The paper trail was carefully marked with a pretend business purpose for the real transactions. With all of the transactions actually taking place, there was at least something to argue about.
But what if the real transactions with a pretend non-tax purpose were themselves imaginary? That's the intriguing implication of a story in this morning's New York Times. The story says Deutsche Bank, which played a prominent role in the shelters that are the subject of the KPMG indictments, is negotiating a settlement of criminal charges related to the Justice Department:
For Deutsche Bank, the path toward a settlement may be rockier, in part because it had a much larger role in the creation of some questionable tax shelters and the transactions underpinning them, investigators have said. A potentially larger obstacle, say the people briefed on the case, is that Deutsche Bank appears unable to account for a number of those transactions.
In the past, Deutsche Bank has described the transactions it arranged for tax shelters, including ones known as blips and cobra, as regular and ordinary.
But Deutsche Bank has been unable to provide to federal prosecutors in Manhattan paper documents detailing some transactions for these shelters, according to the people briefed on the case.
If the transactions never actually took place, that would make it hard to say that people are just being prosecuted for savvy tax planning.
Previously undisclosed internal documents that were provided by a lawyer involved in civil litigation against the bank raise questions about some Deutsche Bank transactions.
An October 2001 e-mail message written by Andrew Baxter, a trader on Deutsche Bank's derivatives desk, to a Jenkens & Gilchrist lawyer suggests that the bank did not extend actual loans to an investor in a cobra tax shelter. For the shelter, the investor had "borrowed" $20 million from the bank and "bought" options worth $20.125 million. Mr. Baxter, whose e-mail message was titled "cash flows," wrote, "Do you want the monies to actually flow into the account or is it sufficient for the client to net pay" the $125,000. "It makes a big difference to our back office."
Wow. If that stuff is true (and these are assertions from people suing KPMG, so they aren't impartial), then the tax shelter industry doesn't even live up to my already low opinion of it.
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
HVB COPS SHELTER PLEA; DEUTSCHE BANK NEXT?
February 15, 2006
Serious activity on the tax shelter front this week:
- HypoVereinsbank (HVB), a German Bank, entered a plea deal yesterday with the Justice Department that includes a $29.6 million fine and a deferred prosecution agreement for its role in implementing tax shelters with the KPMG accounting firm.
- The New York Times reports that Deutsche Bank is also under investigation for its role in the KPMG shelters.
- The IRS released to Tax Analysts a copy of the settlement and cooperation offer ($ link) reported by the New York Times yesterday. The IRS says that it will make this offer to about 100 "accounting firms, law firms, and banks that the IRS contends have been involved in criminal tax shelters," according to an unnamed IRS spokesman.
BAD NEWS FOR KPMG DEFENDANTS?
The admission of criminal wrongdoing by HVB can't be good news for the 19 former KPMG partners and employees under indictment for their role in the shelters. So far none of the indicted individuals has made a plea deal to cooperate against the others; this may increase the pressure on the defendants to strike a deal.
As Deutsche Bank had many more shelters with KPMG than did HVB, they also could have a real problem. Will they also face criminal charges, or will the government try to also turn them against the individual defendants?
As the New York Times points out, "No court has ever ruled blips or the three other tax shelters in question illegal. Still, the I.R.S. has never considered the shelters valid."
BAD NEWS FOR SHELTER BUYERS?
The offer to the other tax shelter promoters could be very bad news for shelter buyers. If they find this an offer they can't refuse, their tax shelter customers will soon get unwelcome certified letters from the IRS; if the shelter promotors cooperate with IRS, it will be very costly for their customers.
Links:
TaxProf Blog Roundup
Tax Analysts Free Coverage
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
ROLLING UP THE BIG FRY TO NAIL MR. SMALL
February 14, 2006
Anybody who has watched too much T.V. knows that detectives go after the Big Fish by getting the petty criminals to cooperate. The IRS appears to be taking the opposite approach in its tax shelter investigations, according to a New York Times report:
The Internal Revenue Service is making an unusual offer of leniency to firms that made and sold questionable tax shelters: come forward, pay penalties and turn over information, and you may avoid criminal prosecution.
The offer is being made to accounting firms, law firms, banks and investment firms that have created and sold tax shelters that the I.R.S. considers bogus, as well as to firms that carried out the financial transactions that underpin such shelters. Questionable shelters have been sold to thousands of wealthy investors in recent years. Under the offer, the firms must disclose the names of those investors.
Interesting. If the pushers of flaky tax shelters turn, the IRS can then sweep up the shelter addicts.
There is a logic to this. If word gets out among tax shelter users that their dealers are ratting them out, they and their associates are going to think twice before jumping into the next tax shelter frenzy, which will surely occur sooner or latter.
If IRS doesn't offer a deal to the promoters, they may be able to run out the statute of limitations on some of their customers. With the names, the IRS can audit the returns of the shelter buyers on an assembly-line basis, probably with a high success rate.
Not everyone thinks that the offer is wise:
According to the Senate report, a 1998 memorandum written by Gregg W. Ritchie, a former KPMG partner and one of the 19 indicted, concluded that aggressive shelters were so profitable as to make the fines and penalties worth the risk.
Gary V. Mauney, a lawyer with Lewis & Roberts in Charlotte, N.C., who represents investors suing the firms that sold them tax shelters, said of the I.R.S. offer yesterday: the "I.R.S. is essentially following the logic of the Ritchie memo. Promoters are going to look at this offer and laugh all the way to the bank."
The promoters, though, may need some convincing:
It is unclear how popular the offer will be among promoters. "It is a bad deal," said one lawyer who represents an accounting firm that has been sued by investors who bought its shelters. He said that the I.R.S. wanted too much information under the offer, citing a requirement that marketing materials and other documents must be turned over, leaving a firm potentially exposed to further investigations and prosecutions.
I don't have much sympathy for this anonymous lawyer. If the shelter can't work if the IRS finds out about it, it shouldn't have been sold in the first place. If the promotors won't share details about their customers, transactions, and marketing, they aren't relying on creative interpretation of the tax law; they're merely trying to skate by on deception, smoke and mirrors.
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
TAX SHELTER GRAND JURY GOING AFTER LAWYERS?
January 25, 2006
The New York Times reports today that there may be more tax shelter indictments, this time targeting a group of Chicago lawyers:
Federal prosecutors are investigating three lawyers at a prominent Dallas law firm, Jenkens & Gilchrist, in a widening of an investigation into questionable shelters that shielded billions of dollars from taxes, according to people briefed on the inquiry.
The criminal investigation of the lawyers, now being heard by a grand jury in Manhattan, is a clear sign that the government is extending the investigation of tax shelters that it considers abusive beyond the case involving the accounting firm KPMG.
There is no indication that Jenkens & Gilchrist itself is a target of the investigation. Petri Darby, a spokesman for Jenkens & Gilchrist, said yesterday, "We are cooperating fully with the investigation."
Instead, the investigation is focused on three current and former tax lawyers based in the firm's Chicago office, the heart of its tax practice. They are Paul M. Daugerdas (pronounced DOG-er-dus), Erwin Mayer and Donna M. Guerin, according to the people who have been briefed on the investigation.
It's interesting that there was never any thought of going after the law firm, while the KPMG accounting firm was forced to throw a number of its people to the wolves under threat of indictment. Are accountants held to a higher (or less low) standard?
Link • KPMG ~ • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
JUDGE PUTS FREQUENT FLIER MILES ON ICE FOR INDICTED ACCOUNTANT
November 15, 2005
A federal judge denied bail yesterday to one of the indicted ex-KPMG partners. The judge ruled David Greenberg was a flight risk and likely to tamper with witnesses.
Kaplan said on Monday that he considered nonviolent witness tampering and obstruction a danger to the community and grounds to deny bail.
The judge noted that the defendant had allegedly told a coconspirator that if he were indicted, he would take about $16 million to $20 million he had put in his ex-wife's name and take off.
Kaplan said that Greenberg's April 2004 formation of a limited liability company in the name of his former wife and his father corroborated that claim. The executive put between $11 million and $13 million into the company's accounts.
After analyzing the signatures on papers forming the company, Kaplan concluded that it was "quite unlikely" that Laura Greenberg, the ex-wife, had signed them at all.
The government has maintained that the former wife was unaware of the formation of the asset-holding company and learned of its existence by mistake through a mass mailing. The judge said the circumstances suggest Greenberg formed the company without his former wife's knowledge and kept its existence from her.
Serious business, indeed.
Link • KPMG ~ • Tax Shelter News • Comments (2) Bookmark: del.icio.us • Digg • reddit
INDICTED ACCOUNTANT CALLED 'FLIGHT RISK'
November 08, 2005
Prosecutors argued yesterday that a former KPMG executive might flee the country if allowed out on bail. Business Week reports:
David Greenberg amassed more than $24 million and then tried to hide it from the government by transferring money elsewhere, including to his ex-wife, prosecutor Kevin Downing said at a hearing. Greenberg, who earned $500,000 yearly from KPMG, also had real estate investments that appreciated, his attorney said.
IS THE COVERUP THE CRIME?
Some have criticized the prosecution of the former KPMG partners on the grounds that the tax shelters have not been proven illegal. Arguments in Mr. Greenberg's hearing indicate that the firm's response to the government investigation of its shelters may be a critical part of the case:
Greenberg's lawyer, John N. Nassikas III, said he assumed the prosecutor was referring to his client as a financial threat to the community. He said his client was no threat and had strong ties to California, including a pregnant fiance.
"We heavily dispute Mr. Greenberg's alleged role," Nassikas said. "There's not an effort to hide information."
But Downing insisted otherwise, saying the government had a cooperating witness and substantial documents to indicate Greenberg backdated documents and improperly took them out of KPMG offices after he learned he was being investigated in 2002.
No bail decision was reached at the hearing.
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
BURN OUT, OR FADE AWAY?
October 18, 2005
Professor Maule addresses the problem of burned-out tax shelters:
But eventually the shelter "burns out." Over time, depreciation deductions diminish and then terminate, while revenue usually increases. At some point, the partnership is passing out net income rather than net deductions. Sometimes this is not a problem, because the partner may have need of passive income and if the income is passive the shelter continues to serve a tax-savings purpose. Often, though, the partner does not want the net income, has no need of passive income, and wants out. The partner's adjusted basis is low, or even zero, because of the deductions. And the capital account probably is negative.
The good professor says the "classic" advice is to die with the shelter. When death becomes an attractive planning option, you know you have a problem.
Link • Tax Shelter News • Comments (2) Bookmark: del.icio.us • Digg • reddit
KPMG: THE OTHER SHOE DROPS
October 17, 2005
The Department of Justice, facing criticism for its indictments in the KPMG case, has responded by upping the ante. Ten more professionals were indicted today in connection with the case, raising the number of defendants to 19. The Wall Street Journal reports:
The indictment charges the former deputy chairman of KPMG, several former heads of the firm's tax practice, a former chief financial officer of the firm and a former associate general counsel, among others. The shelters were designed so that wealthy individuals who had large income or a large capital gain could eliminate taxes on that income or gain. The shelters were designed to look like legitimate investment transactions, but were in fact intended to generate phony tax losses, with no corresponding economic losses to the taxpayers, according to the charges.
The TaxProf has more.
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
GRASSLEY TO STUDY MIERS LAW FIRM TAX SHELTERS
October 13, 2005
Tax Analysts will report in tomorrow's edition that Senator Grassley will study the tax shelter opinions issued by Harriet Miers's law firm. Senator Grassley, the chief Senate taxwriter, will be part of the Miers Supreme Court confirmation process from his seat on the Senate Judiciary Committee.
From the report:
"While it doesn't appear that Harriet Miers was directly involved, Sen. Grassley wants to understand better her work as managing partner as it relates to these tax opinion letters. He also wants to understand better these tax transactions and the role of the law firm in the transactions," a spokeswoman for Grassley, chair of the Senate Finance Committee and a member of Senate Judiciary, told Tax Analysts.
The report also quotes TaxProf Paul Caron on the issue:
"She had the opportunity to have her ethical antennas tweaked here," said Paul Caron, a tax law professor at the University of Cincinnati and the operator of the popular "TaxProf Blog" Web site. "Those ethical antennas were, perhaps, not as sensitive that they should have been."
The article reports that both White House and Ms. Miers's firm, Locke Liddell & Sapp, say the nominee had no involvement in the shelter work.
No link to the story is yet available.
LINK: Complete Tax Update Miers coverage here.
UPDATE 10/14: The full story is up on the Tax Analysts subscriber site here. I'm quoted.
The UPDATE 10/14: TaxProf has made the article available here to non-subscribers.
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
MORE ON MIERS AND TAX SHELTERS
October 12, 2005
Law Prof and blogger Vic Fleisher takes issue with fellow prof-blogger Stephen Bainbridge's "casual dismissal" of the tax shelter opinions written by Harriet Miers's law firm while she was co-managing partner. He says the opinions raise concerns about her judgment and and approach to statutory interpretation:
Fleisher on judgement:
Miers' alleged success as a lawyer -- co-managing partner, president of the state bar, White House counsel, etc. -- is not about her legal ability. It's about her apparent success as a manager of other lawyers. But even if we are now judging the merits of potential Supreme Court Justices based on her ability to manage rather than her ability to think and write about legal issues, Miers may fail on this sorry metric as well. Miers either was or should have been aware of her firms' involvement in the tax shelters, and she should be called on to explain her failure to act.
Fleisher on approach:
The tax shelters provide a nice window into the problem. As once explained by Taxprof Joe Bankman, there is a split among tax professionals. Some of us, mostly the tax elitists and the older generation of tax professionals, prefer to interpret statutes with purpose in mind. And we frequently look to non-literal interpretations of the Code (business purpose doctrine, step transaction, economic substance doctrine, etc.) as a necessary part of tax practice. Others, especially the younger generation and those trained by or sharing ideologies with the Scalia school of statutory interpretation, prefer the plain meaning approach. They tend to read the Code literally, and see nothing particularly wrong with tax shelters. In the two instances we have seen (the CDS shelter and the Rainbo Club property) Miers seems to have voiced no concern about a literal interpretation of the Code.
His post raises a lively debate in his comments section, including a discussion of what knowledge a firm managing partner will have about the firm's lucrative tax shelter practice.
It's not clear that the CDS shelter, the subject of Ms. Miers's firm's opinions, is a "literal" statutory interpretation; "optimistic," "creative" or "wishful" may be more appropriate. Ms. Miers is likely to face questions on these issues before she dons a Supreme Court robe.
Hat tip: the TaxProf
Link: Complete Tax Update Miers coverage.
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
MORE ON MIERS FIRM TAX SHELTER
October 10, 2005
Stephen Bainbridge, the sinister-looking UCLA law professor, doesn't think the CDS tax shelter opinions written by Supreme Court nominee Harriet Miers's law firm should affect her nomination:
Personally, I think this should be a non-issue, even though it seems to be picking up some steam in the blawgosphere. As one of my tax colleagues emailed me to explain:
Although she clearly should have known about this as co-managing partner (billings of $50,000 a pop for 70 opinions is likely to get your attention), it is probably a red herring. Lots of firms were involved in these shelters, including another Dallas firm, Jenkens and Gilchrist, and they don't necessarily disqualify her as a justice as long as she didn't participate in the drafting of the opinions (which were pathetic as a legal matter by the reports of them - evidencing mediocre to bad lawyering, let alone ethics etc). Nevertheless, it is the kind of red herring issue that politicians like to jump on when they want some way to oppose a candidate or get a candidate to withdraw without stating the real objection, which might sound too elitist, too ends-oriented on a particular issue, etc. Kind of like a nanny-gate issue.
"Kind of like a nanny-gate issue." Kimba Wood might have some thoughts about whether a "nanny-gate issue" can be important.
Considering what has happened to Jenkins and Gilchrist, it's surprising that the correspondent discounts the importance of the issue.
Whether or not it should matter, it is likely to. Her role as co-managing partner of her firm is an important credential on a resume lacking any experience as a judge. These lucrative but dodgy tax shelter opinions happened on her watch, and they could tarnish her tenure as co-managing partner. If that doesn't count in her favor, there might not be enough left on her resume to get 50 Senate votes.
Prior Tax Update coverage here.
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
HARRIET MIERS' LAW FIRM: TAX SHELTER PROMOTER?
October 07, 2005
The new Supreme Court nominee's law firm wrote opinions backing a tax shelter that the IRS later ruled a "listed transaction." Tax Analysts goes back to documents a report from Congressional tax shelter hearings for the details:
A February 2005 report from the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (Doc 2005-2795, 2005 TNT 28-28) details the role of Mierss firm, Dallas-based Locke, Liddell & Sapp, in transactions involving a tax shelter known as contingent deferred swap (CDS). The report says Locke, working in concert with accounting firm Ernst & Young, provided clients with a legal opinion assuring them that the transaction "should" be upheld in court if challenged by the IRS.
The report, however, describes widely diverging opinions from Lockes opinion on the transaction, including some from lawyers within E&Y. In an e-mail to E&Y, one clients lawyer denounced CDS as "a classic sham tax shelter."
Ms. Miers was co-managing partner of the Locke, Liddell & Sapp law firm when the opinions were written. Not being a tax lawyer (a pity), she was not directly involved in the opinions, which "typically" returned a $50,000 fee. Reportedly 70 of the CDS shelters were sold.
THE CDS STRUCTURE
The CDS transactions used "swaps" to convert ordinary income to capital gain. In general terms, they worked like this:
- a taxpayer would set up a partnership to own swaps.
- the partnership open a "swap", under which would promise to pay an investment bank the interest on a given sum over a period that would run past its year-end. At the end of the period, the taxpayer would receive a lump sum payment computed on a similar basis. In other words, it would pay an interest amount and deduct it in year one, and it would receive about the same amount back in year two.
- the partnership would engage in short-term securities trading to try to qualify as being in the "trade or business" of securities dealing.
- The partnership would accrue and deduct the payments it was required to make during year 1 as ordinary expenses (giving a 39.6% benefit in those years). It would then pick up the offsetting amount it received the next year as capital gain, taxable at 20%.
The IRS made this a listed transaction via Notice 2002-35. It is apparently no longer marketed. It looks pretty doubtful on its face.
This issue might add some interest to Ms. Miers' confirmation hearings. While she wasn't directly involved in the shelters, as co-managing partner she had to be aware of such a lucrative part of the firm's practice. If the $50,000 fee is correct, the 70 transactions would have generated $3.5 million for the firm, without much more effort than mastering the "find and replace" function on the word processor.
UPDATE: The TaxProf Blog has more.
Links:
Congressional Report describing the CDS transaction (pdf format; CDS is described starting at page 83)
Tax Analysts Story (free version)
Tax Analysts Story (suscriber-only version)
Link • Tax Shelter News Bookmark: del.icio.us • Digg • reddit
WALL STREET JOURNAL ATTACKS KPMG INDICTMENTS
October 06, 2005
An editorial in the Wall Street Journal today criticizes the indictments of former KPMG partners in connection with tax shelter sales:
The KPMG case attempts to short-circuit the messy business of proving that a tax shelter is illegal by using the power of prosecution to target the tax advisers directly. And by cutting them off from the support of their firm through the threat of a death-sentence indictment of KPMG itself, the government seems intent on compelling the accused to cop a plea or settle the case, and so deny them their day in court.
The editorial says criminal charges are at best premature:
Whether a shelter qualifies as a tax deduction is, like any other point of law, adjudicated in court. But BLIPS, FLIP, OPIS and the other tax shelters in this case have never been brought before a judge, so their legality and legitimacy has never been settled as a point of law.
Never. The way tax law has usually developed in this country is that the IRS issues its point of view on a shelter, putting taxpayers who use it on notice. If the IRS then takes the taxpayer to court over the shelter, he has the chance to respond before a judge, who makes a ruling and precedents are thus established. In this case, the IRS has called in the prosecutors first.
By indicting the former partners, the Justice Department assumes a heavy burden of proving true criminal behavior, rather than overly-aggressive tax planning. It will be a disaster for tax enforcement if the IRS can't back up the charges, especially considering the horrendous strain and legal costs to the defendants.
Where The Journal goes overboard is when it implies that, as a general rule, criminal charges shouldn't be made until a shelter is ruled invalid by the courts. While it shouldn't be easy to bring criminal charges, such a test would allow flaky shelters to run riot for years before they work their way through the courts. At what point would the Wall Street Journal allow injunctions against criminal behavior? After the taxpayers lose a Tax Court decision? After two Circuit Courts of Appeal rule against the shelter? Or only after the Supreme Court speaks?
While the Journal feels that the legitimacy of the shelters is still an open question, it's worth noting that the law and accounting firms behind them seem to feel otherwise. Rather than defending the shelters,