Big Four firm KPMG has received more setbacks in the firm's quest to clear its name of wrongdoing in the much-publicized tax shelter fraud scandal. Judge T. John Ward of the Federal District Court for the Eastern District of Texas ruled recently that Blips, the name of one of the tax shelters created, marketed, and sold by KPMG and the subject of ongoing legislation against 16 former KPMG employees, is not a legitimate tax shelter.
Blips stands for Bond-Linked Issue Premium Structure. Judge Ward ruled that the shelter is based on fake bank loans provided by Deutsche Bank and that the shelter had no legitimate business purpose.
Analysts indicate that this decision enhances the prosecution's case against the 16 individual former KPMG employees and two other outside consultants who are facing criminal charges relating to the tax shelters. The trial against these 18 defendants is set to begin in September. Five of the defendants have entered guilty pleas.
In a related matter, the judge ruled in favor of two high-profile investors, Harold W. Nix and C. Cary Patterson, who had sued the IRS after their Blips-related deductions were disallowed. The ruling calls for the two investors to pay the taxes on the Blips deductions but absolves them of the hefty penalties that the IRS had assessed.
Meanwhile, U.S. District Judge Loretta A. Preska entered a decision on Tuesday indicating that the IRS will not be required to turn over documentation that could demonstrate that some members of the federal agency did not agree that KPMG should be required to register the tax shelters.
In January of this year, the IRS announced it had dropped charges against KPMG relating to the tax shelter fraud. The announcement was the anticipated result of an earlier court decision. In 2005, KPMG LLP, the U.S. arm of KPMG International, was accused of fraud relating to the marketing of abusive tax shelters. Rather than facing criminal prosecution in what has been described as the largest criminal tax case ever filed, KPMG entered into a deferred prosecution agreement (DPA) with the IRS.
Among many penalties and restrictions, the agreement called for KPMG to pay a hefty fine of $456 million, cease its private client tax practice, admit that it defrauded the government and the IRS, and agree not to develop, sell, or implement any pre-packaged tax products.