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Guest FLMaster

Illegal 412(i) Plans

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The paper I read it in's online version is down right now, but Google KPMG guilty plea and you will find it in many places such as:

http://www.google.com/url?sa=X&oi=news&sta...3645903&e=50319

This article is much shorter and less in depth than the one I read but it is the same subject.

p.s. Here is a better article:

http://quote.bloomberg.com/apps/news?pid=1...efer=news_index

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Guest mjb

The question of whether there was any economic substance is part of defense to charges since no court has ruled that this shelter was a violation of the tax laws. As noted in my comment on the B & D case, IRS claims of a lack of economic substance have been overturned by the courts who take the position that there only needs to be some evidence of economic substance for the transaction to be legitimate. Also investment banks executed trades involved in the transactions, not KPMG. Proving criminal fraud under fed law can be difficult. Richard Scrushy the Chairman of Health South was acquitted of signing fraudlent SEC statements under SOX even though 7 of his subordinates testified that he was aware that the documents were false. Note: KPMG has agreed to pay a fine of almost $500M to settle the matter with the IRS/DOJ for its particpation in the tax shelters. It is the execs and tax advisors, including outside counsel, who are on trial.

The exc who pled guilty was at the bottom of the food chain and as the Scrushy case demonstrated, statements by little fish are not enough to convict the big fish because the jury discounts their testimony as self serving to reduce their sentence. Testimony that appears inculpatory in the newspapers sounds a lot different in court after cross examination by defendant's lawyers.

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Geez, B. Gotta get you out of the office!

He's a good torturing cross examiner when nobody's lookin. Could be related to Julian Tavares. Mondays 9:00 pm. Try Google.

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Ah. Now I know what you are talking about. We have a 17 year old son who is addicted to the blasted show. I retreat to the bedroom to read whenever it comes on.

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SoCalActuary

Just do a Google search using terms such as ""abusive tax shelter" KPMG" ""abusive tax shelter""law firms"" ""abusive tax shelter" law firm opinon" and that should give you a good idea of the number of lawsuits that have taken or are taking place since 2002 involving such names as Sidley Austin, Jenkens, Locke, Sullivan, KPMG, E&Y, PwC, BDO, UBS etc. And what you see should not include some cases that were settled or which are related to other issues such as COLI programs etc.

What the outcome and what the liabilities will be is something that I guess we will have to wait and see although KPMG and some law firms are trying to settle.

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FYI, Jim Holland said at the 2006 EA meeting that they sent 575 "Howdy" letters to 412(i) sponsors and they are currently examining about 200 cases. He didn't have anything else to report at this time since it is still ongoing.

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Guest FLMaster

Yes, he said that 412(i) plans funded only with annuities are not necessarily safe.

Why?

His rationale refers to PLR 8721115 which (interestingly enough) he wrote in 1987 that stated that a flexible premium annuity would not comply with 1.401(a)(4)-3(b)(5)(iv). You must have a level premium annuity. This can be corrected by an agreement between the Sponsor and the Insurance company according to Newell Kimlin of the IRS TE/GE division.

It is not clear that the service's poistion will be upheld in a small plan audit, see Citrus Valley Estates v. Commissioner 99 T.C. 379 where Mr. Holland provided provided an expert report but did not testify and Judge Clapp of the Tax Court stated " in comparision to the "well reasoned apporach of Klinger, the methodology of Rigel (who tetified using Holland and Ibbotson's analysis) was less complete....and the service went down in flames and ended the small plan audit.

Great midnight reading....

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Guest mjb

Yesterday The judge in the KPMG case questioned ( in his words) the prosecution's murkey definitions of fraud and evasion in the conspiracy to make and sell tax shelters. The judge also asked whether the fraud and evasion occurred in the design or the execution of the shelters. The judge requested the prosecuton to consider dropping some of the 39 charges "in the interest of getting the case tried in a single human life span." Finally the judge noted his concern that the prosecutor's agreement to drop criminal charges against KPMG when KMPG changed its longstanding policy and refused to pay for the legal defense of employees who are criminal defendents in the case could violate the 6th amendment right to counsel. Reference was made by a defense attorney to IRS documents which debated whether the shelters were legitimate.

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Guest FLMaster

I will be on the beach reading about this battle,and keeping my clients away from them. :shades:

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Guest Harry O

The Wall Street Journal certainly says it more eloquently than my March 28th post:

Corporate Injustice

April 6, 2006; Page A14

Two big things happened last week in the federal prosecution of 16 former KPMG partners and two other alleged co-conspirators. The first, which got lots of media play, is that one of the defendants copped a plea. But the second received almost no attention, even though it may have much larger significance for future white-collar indictments.

At a pre-trial hearing in the KPMG case in New York last week, federal Judge Lewis A. Kaplan suggested that a three-year-old Justice Department policy on corporate prosecutions might be unconstitutional. He was referring to the now famous Thompson memo, which in 2003 rewrote Justice guidelines on when to indict entire firms in criminal investigations.

"Too often," the memo states, "business organizations, while purporting to cooperate with a Department investigation, in fact take steps to impede the quick and effective exposure of the complete scope of wrongdoing under investigation." With that as a premise, then-Deputy Attorney General Larry Thompson laid out what firms should do to avoid a corporate indictment, a la Arthur Andersen.

Those steps were extraordinary in their attempt to pressure corporate executives: They include waiving attorney-client privilege to give investigators access to internal documents and cutting off accused employees from legal and other forms of support. In short, the Thompson memo said that companies under investigation are expected to surrender any right against self-incrimination and cut their accused employees adrift.

In one sense, the memo's guidelines are just that -- internal guidelines for prosecutors. But as a practical matter, only a rare CEO will risk the death sentence that a corporate indictment represents. So "cooperation" as defined by Justice is hardly optional. It was on this point that Judge Kaplan took Assistant U.S. Attorney Justin Weddle to task last week. When Judge Kaplan questioned the fairness of pressuring companies to throw their employees overboard, Mr. Weddle replied that companies are "free to say, 'We're not going to cooperate.'"

"That's lame," the judge retorted. He then asked Mr. Weddle "what legitimate purpose" was served by insisting that companies cut their former employees off from legal support. Companies under investigation, Judge Kaplan noted, ought to be free to decide whether to support their employees or former employees without Justice's "thumb on the scale."

Mr. Weddle replied that paying the legal fees of former employees charged with crimes amounted to protecting "wrongdoers." This prompted the judge to remind the young prosecutor that the accused are still innocent until proven guilty. He also reminded Mr. Weddle that the Constitution's Sixth Amendment guarantees the right to counsel. And for good measure, if the government is confident in its case, it shouldn't be afraid to allow "wrongdoers" access to an adequate defense.

On Tuesday of this week, Judge Kaplan dismissed a defense motion to throw out the entire case based on a charge of "prosecutorial misconduct," but he left the Sixth Amendment question open for possible further proceedings. That partial victory notwithstanding, Mr. Weddle's replies betrayed Justice's willingness to trample the due-process rights of companies and defendants in white-collar cases in the wake of the Enron uproar.

It's certainly possible for law breakers to shield incriminating material using attorney-client privilege, but taking down that wall also has serious unintended consequences. For one thing, executives are now on notice that even asking a legal question of an attorney could later be used against them in court -- say, as proof that they were aware that what they were doing might not be proper. The likely result is a greater reluctance to seek legal advice in the first place.

The Thompson memo also notes that firms are "legal persons" that shouldn't be treated more or less leniently by law enforcement because of their "artificial status." But a company and a person are in reality very different. A firm cannot be put in jail or take the stand in its own defense. And bankruptcy nearly always follows a corporate indictment, whether the firm is later convicted or not. That fact alone gives the lie to Mr. Weddle's insouciant reply that companies are free to refuse to cooperate.

The Thompson memo was written at a time when corporate blood was in the political water, and Justice attorneys were angry in particular about Andersen's lack of cooperation. Well, they certainly nailed Andersen, only to have that conviction overturned later by the Supreme Court. The trouble is that in expanding the threat of corporate capital punishment, Justice has also damaged the attorney-client privilege for white-collar defendants and thus the right to a fair trial. And all of this was done with little or no public debate, much less a vote in Congress.

Justice could alter or eliminate the Thompson memo by the stroke of a pen, but it is unlikely to do so until its legitimacy is challenged in court. If Judge Kaplan's reaction in the KPMG case is indicative, that day may not be far off. And a good thing too.

Wall Street Journal, April 6, 2006

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Guest mjb

L: what evidence do you have that he did anyting illegal other than hearsay reported in the media? The issue to be decided in the KPMG case is whether providing taxadvice on transactions which were not considered to be prohibited under the tax law at the time it was given (and also today) is criminal because it allowed clients to avoid paying taxes.

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Guest FLMaster

I agree with MJB. In any event, the case should be in civil not criminal court ( take their money and leave their corpus delecti). We have too many people in prision today.The U.S. has more prisioners than the former soviet union generally for non-violent acts such as drugs due to our goofy drug policy.

The standards for tax shelters and opinions have changed over the years. In 1983-87 we use to draft tax shelter opinions.It was common to allow some serious deductions using non-recourse debt and depreciation write offs from orange groves to gold mines to real estate etc. Now all we have is these retirement plans and ERISA...... :lol:

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Guest mjb

Update on KPMG case: Today's NY Times has an article in the bus section in which the Fed prosecutors have agreed in a letter to the judge that the tax shelters at the center of the govts prosecution were not inherently illegal under the tax law. The govt now claims that the opinion letters were used to disguise fake loans and investments and "contain misleading information, false statements and material omissions designed to to disguise the transactions and mislead the IRS". In other words the govt now claims that the defendants who designed and prepared the tax shelter opinons but did not engage in any illegal transactions made under the shelters knew that the tax shelters would not be operated in the manner described in the letters, not that the tax shelters violated the tax law. This theory is similar to claiming that an auto salesmen who sells a car would be a conspirator if the buyer used the car to commit a crime.

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Guest mjb

There are separate issues. The fed ct is allowing the criminal case to proceed as expected opn the conspiracy theory , but now the Govt will not argue that the tax shelters inherently violated the tax law which was part of the IRSs claim. You want to explain what you are talking about rather than referring to a link?

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Most things in life have various aspects and are not single faceted. I think that we all know that.

The reason for using a link is not for referral purposes but so that anyone who wishes can use the link to get to read what was actually reported rather than rely on a poster's interpretation.

It certainly seemed to be more sensible to give the link so that each person can draw their own conclusions, than to either post the entire article or to summarize it which would, of course, reduce it to being my own opinion. I do not think that anyone's interpretation or opinion is better than the article itself, regardless of what you think of your own opinions.

What is reported in the article is self explanatory. Now at least 1 of the items involved has been declared by a court of competent jurisdiction to have been properly disallowed under applicable tax law based on its nature and substance etc. and not on its operational aspects only. In other words the government can now argue that tax law was violated as they originally intended. That is why I said that they should have waited.

This has nothing to do with the opinion letters, per se, but certainly has to do with the avenues open to the prosecutors regarding illegal activity. As Professor Bankman points out, this ruling "seems to take away one of the defense's arguments".

Is this enough of an explanation of what I am talking about? Or do you need something simpler?

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While we take a break in between rounds, does anybody have one of those "Howdy letters" that Effen referred to that we could be entertained by?

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