2003TAXWEEKLY NO - Mercer University



2003TAXWEEKLY NO. 50, DECEMBER 18, 2003. -

NEWS-FEDERAL, ¶17, DOJ Plays Hardball With Accounting Firm Over Tax Shelters As It Moves To Enforce Summonses | |DOJ Plays Hardball With Accounting Firm Over Tax Shelters[pic] As It Moves To Enforce Summonses

Petitioner's Objections to Reports and Recommendations of Special Master, U.S. v. [pic]KPMG,[pic] LLP, DC D.C., December 8, 2003

One of the nation's largest and most prestigious accounting firms is stonewalling the federal government's investigation of [pic]tax shelters,[pic] the Department of Justice recently claimed. The Department of Justice (DOJ) requested that the U.S. District Court for the District of Columbia order KPMG, LLP to identify tax shelter customers and produce all documents previously determined not to be privileged communications.

Nine summonses

In July 2002, the government, as part of its [pic]tax shelter[pic] investigation, moved to enforce nine summonses against the firm. The district court enforced one summons and held the other eight in abeyance. It directed a special master to review one log that the firm had provided for documents it was withholding under a claim of privilege. The special master ultimately found that the one log was insufficient to support the firm's privilege claims.

λ Comment. The government argued that the log was deficient in many ways, including making assertions and conclusions unsupported by evidence.

New filing

In the most recent court documents, filed December 8, the government averred that the firm continues to make concerted efforts to thwart its investigation. The government claimed that the firm repeatedly supplemented its privilege log to cover documents whose very existence the firm did not disclose for the first 16 months of the action. The firm continued to argue that it did not develop or promote [pic]tax shelters.[pic] The firm also did not accurately describe important documents in the one privilege log.

Regarding the development and promotion of [pic]tax shelters, the government claimed that the assertion continued a pattern in which the firm does not disclose the full extent of its involvement in tax shelters until after it learns the IRS is aware of its involvement. DOJ said that the firm had long known that the IRS had issued summonses seeking information about "listed transactions." According to the government, the firm has tried to cloak its withholding of documents by asserting it is not a tax shelter organizer.

|2004TAXWEEKLY NO. 17, APRIL 22, 2004. - |

|NEWS-FEDERAL, ¶11, Court Denies Injunction: Clients' Identities Not Protected From Disclosure In Tax Shelter Investigation |

Court Denies Injunction: Clients' Identities Not Protected From Disclosure In Tax Shelter[pic] Investigation

Doe v. [pic]KPMG,[pic] LLP, DC Tex., April 12, 2004

Two taxpayers recently failed to per-suade a district court to keep their identities secret from the IRS in a [pic]tax shelter investigation. After a national accounting firm informed them that it could not guarantee non-disclosure of the names in the face of an IRS summons, the taxpayers sought an injunction. The court found that revealing their identities would not disclose any confidential communication despite their protests that disclosure would implicitly reveal their intention to use a tax shelter.

Summons from IRS

The taxpayers employed a national accounting firm to prepare their individual returns, returns for their S corps and to give tax advice. When the taxpayers secured the firm's services, they agreed that certain communications would be kept confidential.

In 2002, the IRS served an administrative summons on the firm seeking information about its clients and a particular transaction. The IRS had identified this transaction as abusive and made it subject to heightened disclosure and reporting requirements. One year later, the firm informed the taxpayers that it intended to reveal their names to the IRS. The taxpayers objected and turned to federal district court for an injunction.

λ Comment. The government also intervened. It was concerned that the limitations period to determine and assess additional taxes would expire before the court made its decision. According to the government, the transactions resulted in tax benefits of between $4 and $12 million.

Confidential communication

Code Sec. 7525(a) protects tax advice from disclosure. It extends a privilege of confidentiality to communications about tax advice. The privilege generally mirrors the one between attorneys and their clients.

The court noted that the attorney-client privilege only protects communications when they are intended to remain confidential and they are made under circumstances where it was reasonably expected that they would be confidential. A client's identity also may be protected by the confidentiality privilege. If revealing a client's identity would reveal a confidential communication, the client's identity is protected.

Here, the taxpayers argued that revealing their names would reveal more than their identities. It would reveal their motivation and purpose for entering into the transactions.

The court disagreed. It found that revealing their names would disclose their participation in the transactions but would not disclose any confidential communication about the transactions. Moreover, their motivation would not be protected by the privilege as anyone who seeks tax advice, the court noted, is looking for ways to minimize his or her tax obligations.

Return information not privileged

The court further found that the taxpayers did not have a reasonable expectation that their identities would not be disclosed. They had filed tax returns reporting losses from the transactions. This information was freely disclosed to the IRS on their returns.

Information transmitted for the purpose of preparing a return is not protected by the confidentiality privilege, the court noted. In addition, the taxpayers should have known that their return information could be questioned during an audit. If the IRS audited their returns, they would have to explain the transactions. They could chose not to, but the IRS would still have known about the transactions. All of these factors, the court concluded, showed that the taxpayers did not have a reasonable expectation that their identities would be protected by the confidentiality privilege.

References: FED ¶(to be reported); IRS:21,400 .

|2004TAXWEEKLY NO. 36, SEPTEMBER 9, 2004. - |

|NEWS-FEDERAL, ¶13, Practitioners' Corner: Full Tax Shelter Hearing Report Points To Billion-Dollar Operations Not Easily |

|Displaced |

Practitioners' Corner: Full Tax Shelter Hearing Report Points To Billion-Dollar Operations Not Easily Displaced

Immediately following the now-historic Hearings on the U.S. Tax Shelter Indus-try held on Capitol Hill on November 18 and 20, 2003, the Minority Staff Report of the Permanent Subcommittee on Investigations was released. While detailed in its overview of the tax shelter industry and its recommendations, that report now represents only the tip of the proverbial iceberg when it comes to the amount of information available as the result of those hearings.

The Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs has just made available four volumes of over 3,000 pages on the hearing. In addition to the 125 pages reproducing the Minority Staff Report, the full Hearings Report containing the testimony and prepared statements of 20 witnesses and hundreds of eye-opening exhibits. Here is some of what is found between the covers of those four volumes. (These volumes are available on the CCH Tax Research Network under S. Hrg. 108-473.)

Case studies

The subcommittee focused on four tax shelter transactions: foreign leveraged investment program (FLIP); offshore portfolio investment strategy (OPIS); bond linked issue premium structure (BLIPS);[pic] and S corporation charitable contribution strategy (SC2). These tax-shelter transactions were previously offered by KPMG. While most of the exhibits originated from KPMG files, similar transactions had been offered by other firms.

A KPMG representative testified at the hearings that "the FLIP, OPIS, [pic]BLIPS and SC2 tax strategies represented a different market place and an earlier time at KPMG. Today, none of these transactions are being offered to clients." He further maintained that while these strategies were complicated, they all were consistent with tax laws at the time.

The minority staff recommended that these policy steps be taken:

λ Focus by Congress on passing legislation that increases promoter penalties, strengthens the economic substance doctrine and bars auditors from providing tax shelter services to their audit clients;

λ Funding by Congress of greater IRS enforcement efforts against tax shelters, and especially against tax shelter promoters;

λ Active participation of the PCAOB in policing public accounting firms' tax shelter activities;

λ Active participation of bank regulators to prevent banks from adding and abetting tax shelters;

λ Active participation of the Justice Department in investigating tax shelter activities at major law firms;

λ New standards for opinion letters, especially for those advising on mass-marketed tax products; and

λ Participation by the AICPA, ABA and American Bankers Association to establish standards of conduct with respect to aiding and abetting, the development and mass marketing, and opinion letter writing in connection with tax shelter activities.

Pressure to sell

A frequent observation from the field is that the tax shelter abuses really began to take off when tax departments at corporations and accounting firms started to be viewed as profit centers rather than compliance-driven groups. Excerpts from exhibits within the reports of internal accounting firm memos confirm this view.

"Product champions needed for the S corp strategy ..I want to thank everyone so far ... Now let's Sell, Sell, Sell!!"

λ Look at the last partner scorecard. Unlike golf, a low number is not a good thing ... A lot of us need to put more revenue on the board ... [Our latest tax shelter package] can do it for you."

λ "If for some reason the IRS decides to "get tough" with someone vis-...-vis the old rules, I suspect it could easily pick on any [big accounting or law firm] - I don't think we want to create a competitive disadvantage, nor do we want to lead with our chin."

λ "Re: Hot Tax Products (5 Month Mission)... We are dealing with ruthless execution-hand to hand combat-blocking and tackling. Whatever the mixed metaphor, let's just do it."

As a prominent tax and accounting professor testified, "There is an awful lot of money to be made by beating the IRS, and the IRS is perceived increasingly as being a paper tiger that doesn't have enough smarts, doesn't have enough ability to stop anything."

More-likely-than-not opinions

A substantial understatement penalty will not apply if an individual taxpayer can establish that he or she reasonably believed that the tax treatment of a tax shelter item was more likely than not the proper tax treatment. A taxpayer can satisfy this standard if he or she reasonably relies on the opinion of a professional tax advisor. As the recent Long Term Capital Holding case indicated, however, a taxpayer is vulnerable on the interpretation of what is considered "reasonable reliance."

According to the IRS, the advice must not be based on a representation or assumption that the taxpayer knows, or has reason to know, is unlikely to be true. The hearing testimony added to this requirement the duty of the tax opinion advisor to rely on investor and third-party representations of facts and circumstances only when they appear to be based on reasonable representations.

Changing environment?

Testimony in the report was mixed on whether major firms are changing their behavior toward tax shelters. Some indicated that there is no need for investigation, reform or stronger laws because the big accounting and law firms that generated the problem are now turning away from marketing tax shelters. Others, however, believe that although a few professional firms may have reduced or stopped seeing generic tax shelters over the last two years, many appear to be committed to continuing their efforts to develop and market generic tax products to multiple clients. The fear exists that this since machinery remains in place, it is ready to run full tilt once more when the economy starts rolling again.

|NON: P13 |

| CTW01 #1560|

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|2005TAXWEEKLY NO. 32, AUGUST 18, 2005. - |

|NEWS-FEDERAL, ¶16, IRS Scores Victory With Promoter's Guilty Plea |

IRS Scores Victory With Promoter's Guilty Plea

In a big win for the IRS, a tax shelter promoter has acknowledged his role in peddling abusive transactions generating more than $1 billion in paper losses. The promoter, who worked in the U.S. for one of Germany's largest banks, sold a shelter known as BLIPS. The promoter pleaded guilty to conspiracy, tax evasion and other crimes.

"These transactions went well beyond aggressive tax planning. They are part of a larger and very sad story about criminal activity driven by greed, plain and simple," IRS Commissioner Mark Everson said in a statement after the guilty plea was announced.

IRS Commissioner's Statement, August 11, 2005

|2005TAXWEEKLY NO. 34, SEPTEMBER 1, 2005. - |

|NEWS-FEDERAL, ¶4, KPMG To Pay $456 Million For Tax Shelter Violations; Tax Practice To Shrink |

KPMG To Pay $456 Million For Tax Shelter Violations; Tax Practice To Shrink

"Big Four" accounting firm KPMG, LLP, will pay a $456 million penalty for tax fraud violations in connection with its sale of abusive tax shelters, the IRS and the Justice Department (DOJ) have announced. According to the IRS, the case is the largest criminal tax case ever filed.

The charges against KPMG and its former employees focus on four tax shelters, known as FLIP (Foreign Leveraged Investment Program), OPIS (Offshore Portfolio Investment Strategy), BLIPS (Bond Linked Issue Premium Structure), and SOS (Short Option Strategy). The agency has collected more than $3.7 billion from investors in another KPMG shelter, known as Son of BOSS. The BLIPS and SOS shelters are related to the Son of BOSS tax shelter.

The Justice Department also indicted nine individuals for defrauding the government by designing, marketing and implementing illegal tax shelters. Eight of the individuals are former KPMG officials. Under an agreement between the DOJ and KPMG, the DOJ will not indict KPMG.

The agreement between KPMG and the Justice Department also imposes permanent restrictions on KPMG's tax practice. The accounting firm must cease its advisory services to wealthy individuals by February 28, 2006, including its private tax practice and its compensation and benefits tax practice.

IR-2005-83, FED ¶(to be reported).

|2005TAXWEEKLY NO. 34, SEPTEMBER 1, 2005. - |

|NEWS-FEDERAL, ¶4, KPMG To Pay $456 Million For Tax Shelter Violations; Tax Practice To Shrink |

KPMG To Pay $456 Million For Tax Shelter Violations; Tax Practice To Shrink

"Big Four" accounting firm KPMG, LLP, will pay a $456 million penalty for tax fraud violations in connection with its sale of abusive tax shelters, the IRS and the Justice Department (DOJ) have announced. According to the IRS, the case is the largest criminal tax case ever filed.

The charges against KPMG and its former employees focus on four tax shelters, known as FLIP (Foreign Leveraged Investment Program), OPIS (Offshore Portfolio Investment Strategy), BLIPS (Bond Linked Issue Premium Structure), and SOS (Short Option Strategy). The agency has collected more than $3.7 billion from investors in another KPMG shelter, known as Son of BOSS. The BLIPS and SOS shelters are related to the Son of BOSS tax shelter.

The Justice Department also indicted nine individuals for defrauding the government by designing, marketing and implementing illegal tax shelters. Eight of the individuals are former KPMG officials. Under an agreement between the DOJ and KPMG, the DOJ will not indict KPMG.

The agreement between KPMG and the Justice Department also imposes permanent restrictions on KPMG's tax practice. The accounting firm must cease its advisory services to wealthy individuals by February 28, 2006, including its private tax practice and its compensation and benefits tax practice.

IR-2005-83, FED ¶(to be reported).

|2005TAXWEEKLY NO. 34, SEPTEMBER 1, 2005. - |

|NEWS-FEDERAL, ¶14, Practitioner's Corner: KPMG Indictments And Fines Demonstrate Government's Willingness To Take Criminal |

|Action Against Tax Fraud |

Practitioner's Corner: KPMG Indictments And Fines Demonstrate Government's Willingness To Take Criminal Action Against Tax Fraud

KPMG, LLP's record settlement shows that the government will not just settle for civil penalties in its campaign against abusive tax shelters. The indictment of nine individuals for conspiracy to commit tax fraud and the imposition of a record fine of $456 million indicate the strength of the government's resolve.

Justice Department and IRS officials said the case was the largest criminal tax fraud case in history. KPMG generated at least $11 billion in phony tax losses and cost the IRS more than $2.5 billion taxes. The indicted individuals -eight former KPMG employees and one outside attorney- could serve five years in jail and be fined up to $100,000 if convicted.

Comment. IRS Commissioner Mark said that the tax system "can't tolerate flagrant abuse of the law and professional obligations by tax practitioners, particularly those associated with so-called blue chip firms like KPMG, which by virtue of their prominence set the standard of conduct for others. Accountants and attorneys should be the pillars of our system, not the architects of its circumvention."

Comment. The actions taken against KPMG and its former employees, including the $456 million fine, involve only the government and do not provide any relief directly to taxpayers who used the firm's services.

High-level professionals

The government's indictment focused on key managers who were responsible for the fraudulent activities. The indicted individuals included a former deputy chairman of the firm, two former heads of KPMG's overall tax practice, and three former heads of KPMG's tax shelter practice who provided services to wealthy individuals. KPMG fired many of the individuals after the Senate Permanent Subcommittee on Investigations shined a spotlight on the firm's questionable actions. KPMG and an attorney with the law firm of Sidley Austin Brown & Wood were accused of generating false and fraudulent opinion letters that claimed the tax shelters "more likely than not" would withstand any IRS challenge.

Fraudulent actions

As part of its agreement to avoid being indicted, KPMG admitted to defrauding the government by devising, marketing and implementing fraudulent tax shelters, fraudulently concealing the tax shelters, making sham attorney-client privilege claims, and preparing and filing fraudulent tax returns that showed phony tax losses. KPMG admitted that it drafted false and fraudulent statements of facts underlying the shelters, issued opinions that contained false and fraudulent statements that KPMG and its clients knew were not true, and impeded the IRS by failing to produce documents and misrepresenting its role in the shelters.

KPMG also admitted making false claims that the shelter transactions were legitimate investments that clients entered into the transactions for investment purposes only. For one of the tax shelters, the firm admitted lying about the duration of the transaction and the clients' motivation for ending the transaction. The firm also admitted that the clients' motivation was to get a tax loss.

Several banks provided funds for investors to engage in the abusive transactions. KPMG admitted that these were sham loans that had nothing to do with any investment and that at least one bank never even serviced the purported loans.

Comment. Sen. Max Baucus, D-Montana, the ranking member on the Senate Finance Committee, has called on Congress to codify the economic substance doctrine to curb abuses Baucus said that KPMG "knowingly broke the law and then blatantly lied about it to Congress, the IRS and the Department of Justice. KPMG's conduct has undermined the integrity of our voluntary self-assessment tax system." KPMG's admissions "underscore the need for strong anti-tax shelter laws," Baucus added.

Four shelters

The charges against KPMG and its former employees focused on four tax shelters, known as FLIP (Foreign Leveraged Investment Program), OPIS (Offshore Portfolio Investment Strategy), BLIPS (Bond Linked Issue Premium Structure), and SOS (Short Option Strategy). The IRS tactics to combat tax shelters include a series of civil settlement initiatives aimed at the investors of phony shelters. KPMG admitted to concocting many of these abusive shelters, including Son of BOSS. The IRS has collected over $4 billion in taxes, interest and penalties through these initiatives. KPMG's BLIPS and SOS shelters are related to the Son of BOSS tax shelter.

Restrictions on tax practice

KPMG agreed to adhere to "a much higher standard" of practice. The agreement between KPMG and the Justice Department imposes permanent restrictions on KPMG's tax practice. The accounting firm must cease its advisory services to wealthy individuals by February 28, 2006, including its private tax practice and its compensation and benefits tax practice, and must not take on any new clients in its private client tax practice. KPMG agreed not to assist in developing, marketing or selling any pre-packaged tax product and not to participate in the marketing of opinions on abusive tax shelters.

Comment. KPMG not to accept fees subject to contractual protection and not to provide tax services under conditions of confidentiality. Piggybacking on the new Circular 230 regulations on tax shelter opinions, KPMG agreed not to issue any "covered opinion" with respect to any "listed transaction."

The agreement also forbids KPMG from generally accepting fees that are not based on hourly rates.

Compliance and ethics

KPMG is required to implement and maintain an effective compliance and ethics program. For three years, an independent monitor will oversee KPMG's compliance with the agreement. After the three-year period expires, the IRS will monitor the firm's compliance for another two years.

Comment. It's possible that the IRS Office of Professional Responsibility will place additional restrictions on KPMG's practice before the IRS, but senior government officials would not comment on this.

Prosecution deferred

The Justice Department agreed to defer prosecution of the firm until December 31, 2006 and to dismiss the criminal proceeding on that date, provided KPMG pays its fine, admits to its fraudulent activities, cooperates with the continuing government investigation, and improves its standards of practice. If the firm does not live up to its obligations, the Justice Department may indict the firm or extend the three-year monitoring period.

The decision not to indict KPMG took into account "collateral consequences," a reference to the demise of Arthur Andersen after the Justice Department indicted that firm for fraudulent tax practices. "Today's agreement ... [protects] innocent [KPMG] workers and others from the consequences of a conviction," Attorney General Alberto Gonzales said. KPMG's "guarantees of cooperation, oversight, and meaningful reform will help to ensure that its future business is conducted with honesty and integrity," Gonzales said.

Fines and taxes

The $456 million penalty includes $100 million in civil fines for failing to register the tax shelters with the IRS, $128 million in criminal fines to disgorge fees earned by KPMG, and $228 million in criminal restitution for taxes lost by the IRS because KPMG refused to provide documents and information before the statute of limitations ran on investors. The agreement requires the firm not to take a deduction for the $456 million penalty and to pay half of any insurance settlement to the IRS. In defending lawsuits by investors, KPMG agreed not to make any claims that contradict its admissions.

Correction to August 11th Practitioners' Corner: In Federal Tax Weekly, Issue No 31, we implied that taxpayers leasing hybrid vehicles would also be eligible for the new hybrid vehicle credit. This was based on statutory language that the new alternative motor vehicle credits applied to vehicles which are "acquired for use or lease by the taxpayer." Subsequent discussions with the staff of the Joint Committee on Taxation have indicated that this statutory language was intended to make the credit available to the lessor but not to the lessee. However, lessees still may indirectly benefit from the credit in the form of lease prices lower than what the lessor could otherwise afford to charge without the credit.

|NON: P14 |

| CTW01 #683 |

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Court denies bail to former KPMG[pic] partner 11/17/2005

A former [pic]KPMG[pic] partner has been denied bail by a federal judge in New York. Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York ordered David Greenberg held without bail. According to published reports, Kaplan was concerned that Greenberg was a flight risk. Greenberg is one of 19 individuals charged with conspiracy to defraud the IRS and tax evasion arising out of tax shelters that KPMG and others designed, marketed and implemented.

The government alleges that the 19 defendants, [pic]KPMG and others sold the shelters to wealthy individuals who needed a minimum of $10 to $20 million in losses. KPMG has entered into a deferred prosecution settlement with the government.

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