US Government Seeks To Resurrect KPMG Tax Shelter Case

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

27 March 2008

It has emerged that the US government is attempting to revive its case against 13 former partners of accounting firm KPMG, who stand accused of facilitating the use of illegal tax shelters which allegedly cost the Treasury billions in tax revenues.

The case, billed as the largest criminal prosecution in US legal history, was thrown out by US District Judge Lewis Kaplan in July 2007, after he concluded that the government had denied the defendants their constitutional right to counsel by pressuring their former employer to cut off payment of legal fees.

But at a hearing in the US Second Circuit Court of Appeals on Tuesday, the government argued that it had not brought any pressure to bear on KPMG to stop paying the defendants' legal fees, and that any violation of their rights had only been temporary.

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.

According to the so-called 'Thompson Memorandum,' written in 2003 by then-Deputy US Attorney General Larry Thompson, prosecutors may consider a company's payment of legal fees for "culpable employees and agents" when deciding whether to indict the company.

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 $2.5 billion in taxes.

However, in August 2005, KPMG avoided indictment by agreeing to pay $456 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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