Illegal 412(i) Plans

[Guest FLMaster]

I suggest that the discussion of tax opinion letters, marketing materials, and plan designs, be moved to this thread as it has nothing to do with case studies of traditional 412(i) plans.

For those who do not know the "bloody history" of illegal 412(i), it started when promoters of 419(a)(f)(6) plans were under attack by the IRS. They had traditionally used a surpressed cash value product to remove assets from their plans. Needing to find another code section,(which was not tainted) the Insurance Gurus discovered 412(i). They took this to several law firms who issued opinions that they were not "springing cash value" products as techincally defined. Next, they wrapped the policy with marketing materials that stated you could purchase 100% life insurance, put $500,000 into the plan and deduct it and then buy the policy out at $87,000. The policy would grow quickly to $500,000 which you could withdraw tax free. Hence, tax deductible insurance going in-tax free coming out. Only creative insurance minds would of thought of this not the green eye-shaded actuaries- While the actuaries on this board were answering hypertechincal questions, the insurance industry sold (by some estimates) $250 million of premium into these plans. In 5 years over one billion will be collected. The insurance gurus claim the actuaries just are not creative, the actuaries stated foul play and we await the IRS (and plaintiffs attorneys maybe if the IRS is sucessful). Who will end up on the short end of this? Probably the taxpayer who purchased the scam/plan. If you look at it from the taxpayers viewpoint-Major Brokerage firm sold it-respected large law firm wrote opinion-large insurnce company issued the product-and major actuairal firm administered it-How could they know it was a scam? Do the insurance companies have any liability? What about the law firms? Will the taxpayers have any money left to fight after the IRS is done with them?

[Guest FLMaster]

Please post comments on the tax opinions here.

[Ron Snyder]

One of the "respected" law firms that wrote an opinion letter on one of the scam 412(i) plans was Bryan Cave. They are a moderately large tax firm and I believe that they should be responsible for their work product. The opinion contained several errors. One of the most serious problems, however, was that the law firm gave an opinion about a plan that operated quite differently from the plan that they gave the opinion about. Did the law firm do this intentionally? Or did their client lie to their own attorneys about how their plan operated? I would sue the promoters as well as the law firm in such a matter.

[david rigby]

"I would sue the promoters as well as the law firm in such a matter."

You would? Why? Do you mean "the IRS should sue..."?

[SoCalActuary]

The IRS is not a party damaged by the firm's actions, the taxpayers are.

Did the law firm describe a program that would fail to satisfy Code and/or IRS regulations?

If so, then they seem a good candidate for liability when the plan failed to meet its stated goals.

If not, then they have a good defense, and the promoters have a problem because they failed

to control the operation of the plan.

[Belgarath]

Quick edit - it was by attorneys in a law firm named Bryan Cave - I don't know who actually wrote the article.)

Veba - I read an article by Bryan Cave on this back in 2003. They, like every other source I've seen who said it was ok to issue 100% life insurance, rely heavily on the word "or" in 1.412(i)-1(b)(2)(i). Which says, "The plan must be funded exclusively by the purchase...of individual annuity OR individual insurance contracts, or a combination thereof." And in -1(b)(ii) of that section, it starts of with, "The individual annuity OR individual insurance contracts issued under the plan..." They read the use of the word "or" to be a clear indication that the drafters of the regulation contemplated 100% to insurance.

I was asked about this argument (in general, not specific to the Bryan Cave article as the question predated the article by a year and a half) back in 2002, and here's an excerpt from my response - and please keep in mind I'm not an attorney - this response was merely to a co-worker. "Purely playing Devil's Advocate here, I could read these regs to permit investment only in life insurance if it suited my purpose to do so. I could not in good conscience make this reading as a CORRECT reading, because I simply do not believe it is correct. If a client and/or their legal counsel were to either call the IRS, or request a PLR, I suspect they would get the same answer that I would give - you can't do it!"

Not having any notion whatsoever of the twisted legal system requirements, it would nevertheless seem a bit harsh to make the law firm liable for reading the regulation in this manner. Although aggressive, and was in my opinion a wrong reading, I'm still not sure that it rises to the level of pure negligence. But maybe it does. However, it is possible that they warned their clients, for example, that it was an aggressive stance that might be challenged by the IRS, and the clients went ahead anyway. I'm a little hesitant to assume that just because someone spouts off in an article that their specific advice to individual clients is necessarily the same as what is contained in the general article.

That said, I suspect some folks will agree with you and the litigation treadmill will start at some point. Hopefully not too many people actually implemented such plans.

[Guest mjb]

I am always amused when tax advisors are questioned for issuing opinions that are based on the literal language of a statute or regulation issued by the IRS since the law/regulation is a defense to a violation of the tax law. I have never heard of a tax opinion being termed aggressive when it relies on the literal wording of a regulation. Aggressive opinions are those that don't have any substanital authority under the tax law for their conclusions, such as PLRs or ct cases. While the IRS prohibits excessive LI in a 412(i) plan, see Rev Rul 2004-20, I havent seen any rulings that prohibit a 412i plan from being funded solely with LI as permitted under the Reg. I am interested in any statements to the contrary. I thought 412i was enacted for a certain type of LI policy called a retirement income policy in which the cash reserve for retirement income could exceed the face value of the death benefit. As any tax advisor will tell you oral or informal opinions of the IRS are not binding on the taxpayer so I dont see what is the need to call the IRS. Besides IRS opinions that contradict the regs are not enforceable against a taxpayer (and the IRS cannot issue a PLR that disagrees with a reg.)

The ability of the IRS to declare certain transactions which are not explicitly prohibited under the IRC or regs to be illegal tax shelters subject to criminal prosecution will get its day in court when the KPMG tax shelter case is tried. The multiple defendents including attorneys have challenged their prosecution with a defense that there has been no ct decision that the tax shelters they promoted and rendered opinions on, and which IRS declared to be illegal, violate the IRC.

Note: My post expresses no opinion on whether springing cash values policies can be used under 412i.

[Guest FLMaster]

We know that the last word will rest with the Courts.It is clear these opinion letters were flawed as case law and rulings existed at that time that would tell law firms not to "game" a policy. The game is surpressing the cash values in the early years and expand the cash values in the later years after the policy is purchased out of the plan. Why would anyone purchase an insurance policy (or any investment) that after $500,000.00 in contributions is worth $87,000.00???? Well, the next 5 years a miracle will occur. Your investment will grow 50% each year and be worth $500,000++(after you took the policy out of the plan of course at $87,000 and paid the income tax). The Third Circuit said (in Neonatology) we will not allow the taxpayer to engage in "financial fanatsies" by making investments which have no economic substance and is designed for the sole purpose of avoiding/evading taxes. Our legal brethern (in spite of this) issued tax opinions that supported this transaction. Why should we be upset? It is an insult to every actuary who reads the rules, test plans, follows the law, and ask and answer hypertechincal questions on these boards to keep plans in compliance while the insurance gurus live in an epideictic world.

[Guest FLMaster]

MPreston: A penny for your thoughts on the tax opinion letters.

[Mike Preston]

There is a lot of material there. I probably won't have time to read them until after 4/15. Thank you for forwarding the material.

[Ron Snyder]

Pax- If I were the taxpayer losing his tax deduction I would sue the law firm as well as the promoter.

Belgarath-Of course Bryan Cave was the firm I referred to earlier. The history of 412i didn't start in 2000, or with the issuance of the Regs. There was no excuse for the intentional misapplication of the language of the law or Regs.

MJB-You are correct that 412i plans could be funded 100% into retirement income policies (a form of insured annuity), but those policies don't exist anymore. The problem came when aggressive practitioners decided not only to use UL contracts and then phantom cash value contracts for such plans. I'm probably the only one old enough to remember retirement income policies: before ERISA, defined benefit plans were commonly funded with them.

As an attorney I was recently sued for something a client did that I supposedly advised him (I orally advised him NOT to proceed, but got sued anyway). I received a total of about $8,000 of fees for the matter. By the end my E&O carrier had spent about $60,000 in legal fees and settlement costs, plus my $10,000. Attorneys should be getting the message (as I did): there are consequences for giving opinions.

[Guest FLMaster]

I agree with VEBAGURU, law firms should exercise "some" social responsibility. MPreston has the opinions and after April 15th I will be interested in his opinions. The problem I have with these illegal 412(i) plans is it gives the legitimate providers a bad name, and there are legitimate providers in the market. The other problem I have is illegal promoters enriched themselves at the expense of legitimate providers like Blinky, MPreston, and AndyH, etc. who even though I argue with(I am also an attorney and like to argue anyway) I still believe they should be handling these plans not the illegal 412(i) promoters, and I am sure that they would show other plans than a 412(i) which may not be appropriate for the sponsors.

Why should the "illegal" 412(i) promoters be allowed to purchase big homes in the Virgin islands with their ill-gotten forunes when the legit guys like MPreston that does tradional plans slave away doing ADP/ACP testing at tax time and doesn't have the time to read the bogus opinions until after April 15th!

[Guest mjb]

FL: As an attorney you are aware that the canon of ethics for attorneys requires the zealous representation of the client's interest, not the public's interest. An attorney who provides merely adequate or prefunctory advice that does not solely represent the client's interest to the best of his ability or has a conflict with another client interest violates the Canon of Ethics. A few years ago I was asked by a client to represent him in a RE transaction but not provide any advice or review documents because he only wanted to fulfil the requirement of being represented by counsel. I refused to represent him because it would not permit me to exercise proper representation.

Attorneys are free to decline to represent a client on matters they personally disaprove of, e.g., criminal cases, but once they agree to represent the client they must zealously represent the client's interest, not the public's interest.

As for suing law firms for losing a deduction you really need to read the opinion for all of the disclaimers and caveats which note the likelhood for a denial of deductions. Most opinion letters prior to the change in the tax law in 2004 only protected the client from having to pay the penalities for substantial underpayment of taxes in the event the IRS prevailed so as to make claiming the deduction no worse than not engaging in the transaction. I once reviewed a 60+ page opinion on a multiple employer veba which stated in a paragraph buried at the end that the opinion of counsel was subject to the contrary view of the IRS but noted that the opinion would prevent the imposition of tax penalities because it was based on substantial authority, e.g., cases and rev. rulings discussed in most of the opinion.

[Guest FLMaster]

First: In regards to the canon of ethics for attorneys. The ethical rules are different from state to state. In some states for example in Florida, if you place an adverisment in a newspaper it is subject to review or you are subject to disciplineary action. In other states, this is not true. In some states it is unethical to give out a business card unless solicited, in other states this is not true. Ethicical rules differ from state to state. The interpretation will also differ as well.

Second: In regards to liability. It is clear that attorneys and law firms are very good at shielding themselves from liability by creating tax opinions etc. and stating this is to only be used by the person who hired me etc. etc. Next, de-facto they give their permission for the user to spread the gospel among the hoi palloi knowing it would be used to create sales and the reader would ignore the fine print or not understand it. What I say to you is ....someday a trial judge will overlook the fine print and allow these facts to go to a jury. As you well know law 101 is when the law says, law 102 is what the judge says the law says which may have nothing to do with 101. (of course this could all be overturned by appeals-law 103). Hope this is helpful.

[Guest FLMaster]

Well the action has started in Kennard v. Indianapolis Life 2006 WL 616014 in illegal 412(i) plans. Law 102 is in effeect as the motion to dismiss was denied by Judge Fish in the Northern District of Texas. The defendants are Indianapolis Life, Xelan and ...the insurance agent (the law firm slipped out the back door).

Xelan filed bankruptcy, so all we have left is the agent and the insurancce company. The lawsuit refers to violations of State Insurance Codes and triple damages! Another interesting issue is that the policy was not approved by the state as a 412(i) policy. Only in Amerika!

[GBurns]

FLMaster

I was not aware that any state approved policies for specific uses. Which states have approved what policies for use as 412(i) policies?

As for the law firm slipping out the back door, that should only be temporary and I wait to see what action will eventually be taken against them. KPMG etc and the law firms that supported those tax shelters certainly are not escaping the consequencies of their opinion letters as yet and neither should this one.

[Guest mjb]

GB: What makes you think the law firm will be liable for the opinion. Law firms are famous for giving clients opinions that provide no protection from the IRS. The best opinions for the law firm are those that state that they are subject to the contrary interpretation by the IRS because the law firm has not guaranteed the tax deduction will be upheld. As for KMPG, the question will be whether there can be a criminal conspiracy to violate the tax law in a transaction that has never been ruled to be an evasion of income taxes.

[Guest Harry O]

I think the portion of the government's prosecution of KPMG relating to the "selling" of the tax shelters is a disgrace. They are attempting to criminalize an interpretation of the tax law where reasonable people may differ (and, as mjb points out, where the IRS's interpretation has yet to be endorsed by any court). KPMG's actions were in no way like some looney tax protestor who "interprets" some section of the Internal Revenue Code to exempt wage income from tax. The government is threatening these guys with personal bankruptcy by forcing KPMG to cut off their indemnification of legal expenses or have the firm indicted. KPMG obviously did what it had to in order to protect itself. This squeezes the former KPMG partners and employees since they can either capitulate or spend every last cent they have defending themselves. This should terrify anyone working for an organization that has promised to indemnify you against legal costs you incur that arise out of the performance of your job.

That said, the government can prosecute away as far as I am concerned regarding how certain members of KPMG may have reacted to government subpoenas, etc. once the government started investigating. If documents were withheld then anyone involved in that aspect deserves what is coming to them.

[Guest mjb]

It is very difficult for the Govt to prove that a business transaction violates the tax law. A few years ago Black and Decker prevailed against the IRS after B & D set up a free standing off shore subsidiary into which they transferred all of their retiree health care liability in which the only assets were B & D pref. stock for which B &D took a deduction for the dividends. The IRS said it was tax scam because there was no legitimate business purpose for the sub but the Fed ct said that B & D had a legitimate business motive in setting up the sub because it was intended to provide for health care expenses.

[Guest FLMaster]

To GBurns: Yes, the states do require that if a product is submitted as use in a 412(i) plan it must be approved by the State Insurancce commissioner to be sold in a 412(i) plan. I personally know of several carriers who had their annuity products declined for 412(i) by ceratin states as the guaranteed interest rate was too low. The illegal 412(i) providers did not run these products through state compliance-now what a surprise.

[Guest FLMaster]

The law firm is liable for the tax opinion to the person they wrote the opinion, which is not the taxpayer who used the opinion, but the promoter.

Basically, here is how tax scam 101 works.

Step 1.Tax promoter receives scam opinion from law firm.

Step 2.Tax promoter gets insurance company to sell product into the scam.

Next:The IRS audits taxpayer. The IRS takes away all money from taxpayer. The taxpayer now sues promoter and insurance company and law firm. Insurance company says-we just sold a product, Law firm says we issued the opinion to the promoter not to you, the promoter flees to the virgin islands. The taxpayer is broke and cannot pursue the promoters or pay any more legal fees.

End result: Promoter is living well in the virgin island, the law firm made payroll, the insurance company has the money and the taxpayer is bankrupt....only in Amerika!

[Guest mjb]

There are different grades of tax opinions- there are tax opinions that are issued by prominent firms to corporate clients who need a tax benefit to make a $5+B deal work where the firm will strive to find enough "substantial authority" to justify a more likely than not opinion necessary to claim the tax benefit and avoid penalities and puts the firm at risk. At the other end of the spectrum are "cold comfort" opinions that do not provide any opinion that a taxpayer will prevail against the IRS but only describe the risks of taking a position under the tax law. These opinions were frequently marketed to promoters selling vebas, split $ or 412(i) plans because the prospectrive clients did not read the opinion letters to identify the risk (and did not pay the LF for the opinion). In some states the client cannot sue the firm for the opinion it rendered to the promoter because their is no privity of contract between the firm and the client. In other cases the lack of a representation that the taxpayer would prevail against the IRS absolves the LF of any liability. Under C230 all tax opinions to promoters will be marketed opinions with the disclaimers that it cannot be relied on by a taxpayer to avoid tax penalties unless the client is willing to pay big bucks for the firm to perform the necessary due dilligence for a reliance opinion that doesnt contain disclaimers. Bottom line on LF opinions is caveat emptor.

[Guest FLMaster]

I concur with MJB. It is too bad that clients do not consult with a qualified advisor before they make their decisions. I did have one prospective client who was warned if entered into an illegal 412(i) he may not have the deduction upheld. The prospective client was a doctor from the midwest area and he said, if it was not upheld he would just sue the agent and insurance company and his adviosr from Xelan.....wish granted.....

[Locust]

Harry O and mjb - the recent reports of the KPMG prosecutions indicate that the KPMG promoters didn't bother to complete some of the off-shore transactions that were part of the overall transaction that resulted in the tax benefits. [since the transactions apparently didn't have any substance anyway, why go to the extra expense and bother of completing them?] Doesn't this, plus the way the transactions were promoted (confidentiality agreements), plus the active steps to hide what was being done (didn't report them as tax shelters, use of tiered limited partnerships, offshore transactions), plus the tremendous fees made by the promoters (based on tax savings), plus the tremendous amount of loss to the Treasury, at least give the appearance of something wrong? How do you get to these issues, unless you go after the promoters? And finally, isn't this why KPMG got the big fees, because of these risks - shouldn't KPMG bear some of the risk - indeed most of the risk, since they are the promoters, the experts, and licensed to practice before the IRS (and therefore in my opinion with some professional responsibility to the tax system - perhaps an old-fashioned view on my part)?

[AndyH]

Ditto

Will add due respect to HarryO, and I do mean that, the confession that I read in the newspaper yesterday from a former KPMG executive seemed awful thorough and damning. It left no impression of ambiguity or room for interpretation whatsoever.

[SoCalActuary]

Can you post the source of your KPMG news article? What paper, what section, what date?

[AndyH]

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

[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.

[AndyH]

Jack Bauer would agree.

[Belgarath]

I'll probably regret asking, but who is Jack Bauer?

Did the Red Sox get him in a trade?

[AndyH]

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.

[Belgarath]

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.

[GBurns]

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.

[Effen]

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.

[Ron Snyder]

He also said that a 412(i) plan funded ONLY with annuities was not necessarily safe.

[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....

[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.

[Guest FLMaster]

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

[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

[Locust]

Barry Bonds hasn't been convicted of anything either.

[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.

[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......

[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.

[GBurns]

Maybe they should all have waited a few more days. The New York Times reported on Saturday in the Business section that "U.S. Judge Backs I.R.S Ruling Invalidating Tax Shelter, Possibly Aiding U.S. Criminal Case".

http://www.nytimes.com/2006/04/22/business/22shelter.html

[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?

[GBurns]

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?

[AndyH]

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?