US Appeals Court Upholds Dismissal Of KPMG Tax Case

by Glen Shapiro, LawAndTax-News.com, New York

01 September 2008

A federal appeals court has rejected the US government's attempt to resurrect the case against 13 former employees of accounting firm KPMG, who were accused of helping wealthy clients evade billions of dollars in taxes.

On Thursday, a three-judge panel of the 2nd US Circuit Court of Appeals in Manhattan unanimously upheld a decision by US District Judge Lewis Kaplan in July 2007 which ruled that the government had infringed the defendants' constitutional right to mount a defense.

The case, billed as the largest criminal prosecution in US legal history, was thrown out by Judge Kaplan after he concluded that the government had overstepped its powers by pressuring their former employer to cut off payment of legal fees, in breached of their Sixth Amendment rights.

While it was normal practice for KPMG to pay the legal costs of former employees accused of wrongdoing, it reversed its policy in this case, fearing that, by being seen to be helping the defendants, it could bring about an indictment on the company itself.

In a scathing attack on the actions of the Justice Department, Kaplan wrote in his judgment that the government's actions were "intolerable in a society that holds itself out to the world as a paragon of justice."

The defendants, of which there were initially 19, were accused of helping to structure and sell the tax shelters, which were deemed abusive by the Internal Revenue Service. The agency has estimated that the tax shelters helped investors avoid some USD2.5 billion in taxes.

However, in August 2005, KPMG avoided indictment by agreeing to pay USD456 million in penalties to cover former clients who participated in the tax shelters, known as Blips, Flip, Opis and Short Option Strategy.

Four of the original 19 defendants are scheduled to go on trial later this year.

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