KPMG’S Statement Regarding Hearing in the “U.S. Tax Shelter Industry”

KPMG LLP issued the following statement in regard to a hearing today of the U.S. Senate Permanent Subcommittee on Investigations, at which current and former KPMG partners testified on the subject of tax services formerly offered by the firm:

At the invitation of the Subcommittee, KPMG partners and former partners participated in the hearing today examining the activities of accounting firms, banks, investment advisors and law firms in offering aggressive tax strategies to their clients in the late 1990s and early 2000s. Four past tax strategies presented by KPMG to its clients were examined by the Subcommittee as case studies of prior activities of the entire profession. None of the strategies used as case studies - nor anything like these strategies - is currently being presented by KPMG to our clients.

Discontinued Tax Strategies

KPMG no longer offers or implements aggressive look-alike tax strategies - like FLIP, OPIS, BLIPS and SC2 - to multiple clients. These types of tax strategies, while technically compliant with the law, are no longer presented to KPMG clients. Today, tax strategies must not only be technically correct and defensible, but they must also be consistent with KPMG's policies and procedures and must not, in any way, put the reputation of KPMG or our clients at risk. All tax strategies are now judged by these three standards.

KPMG provided to the Subcommittee a list of 500 tax planning solutions and concepts that KPMG has analyzed over the past several years and may present to our clients, depending on their specific needs and situation. These are not aggressive tax strategies such as the discontinued tax strategies that were the subject of the hearing. This list identifies tax planning opportunities available to our clients and permitted under the Internal Revenue Code.

Tax Strategies Consistent with Law

The fact that the IRS has challenged certain past tax strategies does not render them "illegal" - that determination is left to the courts after due process of the law. In fact, no court has found any of the tax strategies presented by KPMG to our clients to be inconsistent with the tax laws. In some cases, the IRS has agreed that taxpayers should be allowed to retain a portion of the tax benefits they claimed as a result of implementing a strategy. Additionally, KPMG does not and will not accept any new engagements for advice and opinions on tax shelters that have been listed and deemed abusive by the IRS.

Eliminated Marketing Structure, Activities

Starting more than two years ago, KPMG has discontinued many of the marketing structures and activities associated with FLIP, OPIS, BLIPS and SC2. The decision to close the Stratecon and Innovative Solutions practices was made in mid-2002, with implementation completed in October 2002. Positions such as National Deployment Champions and Area Deployment Champions, which were charged with marketing these tax strategies to our clients, have been abolished. The Tax Innovation Center, which was responsible for marketing look-alike tax strategies designed to be presented to multiple clients, has also been disbanded.

Conservative Approach to Tax Strategies

These changes are due to a fundamental evolution in the leadership philosophy of the firm. Today, KPMG takes a much more conservative approach to the tax strategies being presented to our clients. They must not only be technically correct, but also must in no way risk the reputation of the firm and our clients. The enhanced, independent review processes we have put in place over the past three years is testament to that new philosophy.

Decisions to Register Based on Legal Interpretation

KPMG's decisions not to register various tax strategies were based on detailed analyses of the complex provisions of the Internal Revenue Code dealing with the registration of potentially abusive tax shelters. They were not based on any business issues, potential revenues or possible assessment of penalties. Rather, KPMG conducted a thorough analysis of the law as applied to the facts of the transactions and determined, in each case, that there was a reasonable basis not to register the strategies.

Cooperation with IRS and Congress

KPMG is cooperating with the IRS, the Subcommittee and other government agencies examining past tax strategies. KPMG turned over more than 50,000 pages of documents to the Subcommittee as well as more than 600 boxes of documents to the IRS. KPMG has also provided to the IRS the client names requested by it in response to validly issued summonses from the IRS. KPMG has had a disagreement with the IRS regarding disclosure of privileged information about client matters. Recently a Special Master, who is a retired federal magistrate, agreed with KPMG that the majority of the documents under dispute are privileged and should not be turned over to the IRS.

Integrity of KPMG's Independence

KPMG rigorously maintains and protects the integrity of our role as independent auditors. KPMG firmly believes that no actions relating to our past tax strategies in any way risked our role as independent auditors for our clients. Today, under the Sarbanes-Oxley Act, tax services provided by audit firms to their audit clients are uniquely regulated - all tax services provided to audit clients must now be pre-approved by audit committees composed of independent directors.

KPMG provides professional tax services to a number of clients. Some of those clients may include customers of audit clients. Our policy, in compliance with SEC and professional rules and regulations governing auditor independence, is that the firm does not pay referral fees to its audit clients, nor engage in joint marketing activities with its audit clients or have direct or material indirect relationships with them. KPMG believes its actions complied with independence rules and regulations. In fact, we have designed and implemented independence policies and procedures that meet or exceed the standards of the SEC and other regulatory bodies and believe that our independence procedures are among the best in the industry.

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