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Ernst And Young Partners Indicted In Tax Shelter Probe

by Leroy Baker,, New York

01 June 2007

The United States government has charged four current and former partners of big-four accounting firm Ernst and Young with tax fraud conspiracy and related crimes arising out of tax shelters promoted by the firm.

According to the indictment, unsealed in the US District Court in Manhattan on Wednesday, the defendants and their co-conspirators concocted and marketed tax shelter transactions based on false and fraudulent factual scenarios to be used by wealthy individuals with taxable income generally in excess of $10 or $20 million to eliminate or reduce the taxes they would have to pay the IRS.

The indictment charges four individuals in 8 separate counts, including conspiracy to defraud the IRS, tax evasion, making false statements to the IRS, and impeding and impairing the lawful functioning of the IRS. The government stressed that at this stage, E&Y itself is not under investigation.

All four individuals allegedly worked in a group set up by E&Y in 1998 to develop tax shelters, which was first named VIPER (Value Ideas Produce Extraordinary Results), and later renamed SISG (Strategic Individual Solutions Group)

The four individuals named in the indictment include: Robert Coplan, a former E&Y tax partner who was the leader of the VIPER/SISG group, and the former National Director of E&Y’s Center for Wealth Planning; Martin Nissenbaum an E&Y partner who was a member of the VIPER/SISG group, and the National Director of E&Y's Personal Income Tax and Retirement Planning practice; Richard Shapiro, who was a member of the VIPER/SISG group, and an E&Y tax partner; and Brian Vaughn a former member of the VIPER/SISG group, and a former E&Y tax partner.

The charges allege that from 1998 through 2004, the four defendants and others participated in a scheme to defraud the IRS by designing, marketing, implementing and defending fraudulent tax shelters. The conspirators also sought to deceive the IRS about the bona fides of those shelters and the circumstances under which the shelters were marketed and sold to clients.

The charges allege that in order to encourage clients to participate in the shelters, and to shield the clients from substantial penalties that could be imposed if the IRS disallowed the claimed tax benefits, the defendants worked with law firms to provide E&Y's clients with opinion letters that claimed the tax shelter losses or deductions would "more likely than not" survive IRS challenge, or "should" survive IRS challenge.

The government said that the defendants and their co-conspirators were motivated by taking a slice of the highly lucrative tax shelter market in which other accounting firms were already participating, and to prevent its high-net-worth clients from taking their business - including, potentially, the highly prized audit business associated with some of these individuals - to its competitors.

Among the alleged fraudulent tax shelter transactions designed, marketed, and implemented by the defendants and their
co-conspirators were CDS (Contingent Deferred Swap); COBRA (Currency Options Bring Reward Alternatives); CDS Add-On; and PICO (Personal Investment Corporation).

The indictment also charges Coplan, Nissenbaum and Shapiro with implementing a tax shelter in 2000 to evade their own taxes, and with arranging for eight of their E&Y partners to participate in the tax shelter transaction with them. The use of that tax shelter enabled the group to eliminate a total of approximately $3.7 million in taxes, the indictment said.

"This prosecution further demonstrates our commitment to hold accountable tax professionals whose deceit costs this country untold millions in tax revenues," commented Michael J. Garcia, United States Attorney for the Southern District of New York. "The conduct charged in this Indictment far exceeds the bounds of legitimate tax planning and reflects flagrant disregard of the law," he added.

Acting IRS Commissioner Kevin Brown stated: "According to today's indictments, these individuals conspired to defraud the government through a series of fraudulent tax shelter products. They sold these products to high-income clients seeking to
diminish or eliminate their tax liabilities. The IRS and the Department of Justice will continue efforts to combat illegal tax shelter activity and ensure the integrity of our tax system."

Garcia added that the investigation into E&Y's role in devising and selling tax shelters was continuing.

Coplan, Nissenbaum and Shapiro were each freed on $1 million bail, while Vaughn was freed on $300,000 bail. All pleaded not guilty to the charges.

In a statement yesterday, Ernst & Young said the four indicted men were part of a small group within the firm, disbanded years ago, that was responsible for developing the transactions in question. "None of the individuals was part of the firm’s management," it said.

“Ernst & Young has cooperated with the government from the beginning of its investigation. We have voluntarily made many changes and enhancements to our tax practice. We have also made other changes to our tax practice pursuant to our 2003 agreement with the IRS, which the IRS Commissioner called a "model for agreements with practitioners," the statement added.

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