KPMG's Admission May Hurt Civil Tax Shelter Case
KPMG's acknowledgement of “unlawful conduct” in selling questionable tax shelters may help the firm it in its negotiations with criminal prosecutors, but it may make big civil fines more likely.
Big Four accounting firm KPMG, in a statement last week, said it “deeply regrets” tax shelter abuses and “takes full responsibility.” Its admission may hurt the other defendants who also worked on selling the tax shelters and were sued by investors along with KPMG, the Wall Street Journal reported.
The other firms include: Sidley Austin Brown & Wood, which provided advice to investors; Deutsche Bank; Presidio, a San Francisco investment advisory firm started by ex-KPMG partners; and the Quellos Group of Seattle, which helped execute some shelter transactions under the name Quadra Capital Management.
Lawyers for investors were pleased with the company's statement. "It's stunning," said Gerald H. Silk, whose New York firm, Bernstein Litowitz Berger & Grossmann, is pressing a lawsuit against KPMG in a state court in Arkansas. "Obviously, it's very helpful," he told the Journal.
KPMG sold a tax shelter to Thomas Becnel of Destin, Fla. who is now suing. "We relied on defendants' representations that these products were legitimate and have been subjected to millions of dollars in damages because they were not," he said in a statement. "As a businessman, this is not the type of behavior I expect from my professional advisors, especially when they are as seemingly well respected as KPMG, Presidio, Deutsche Bank and Sidley Austin."
Tanina Rostain, a tax law professor at New York University law school, who is researching KPMG, gave the Journal another viewpoint. She said the firm could defend itself in civil suits by saying that it made the risks clear in its engagement letter. So KPMG could argue that clients "were, in effect, complicitous in the wrongdoing.”
The Internal Revenue Service invalidated four shelters sold by KPMG between 1997 and 2001. A Senate report, which cited internal e-mails and testimony, said the firm's tax shelter work brought in $124 million in fees. One e-mail message appeared to weigh the risks of litigation against the fees coming in: "Are we being paid enough to offset the risks of potential litigation? We should be paid a lot of money here for our opinion since the transaction is clearly one that the I.R.S. would view as falling squarely within the tax shelter orbit,” a company official wrote.
As for the criminal case, KPMG and Justice Department officials are continuing to negotiate, with a settlement possible rather than an indictment.