Federal prosecutors investigating abusive tax shelters struck a plea agreement with a banker on Thursday in the first criminal charges brought in the case, according to the Washington Post. Domenick DeGiorgio, the former managing director of HVB Group, pleaded guilty to four counts of conspiracy, wire fraud and tax evasion relating to his participation in selling a tax shelter known as BLIPS or Bond Lined Issue Premium Structure, created and marketed by KPMG.
DeGiorgio said he knew the tax structure lacked economic justification. At his court appearance, according to a report in the Wall Street Journal, DeGiorgio described how BLIPS worked and the bank's role in the tax shelter.
âAn essential part of creating reported tax losses depended on the Bank purporting to provide a loan structured in a particular way,â he said in the WSJ report. âThe loan proposed by the BLIPS promoters was a sham because, among other things, as designed, no money ever left the bank, and because HVB never set aside any of its own money or procured funds from the banking market in order to fund any of these loans.â
Mr. DeGiorgio continued, the WSJ report said âBLIPS was falsely represented to be a three stage, seven year investment program when, in reality, it was a short-term transaction designed to create tax losses.â
The tax-evasion charge did not relate to DeGiorgio's use of BLIPS, but his failure to report income he earned for promoting and participating in the tax shelters to the Internal Revenue Service or to his employer.
The plea agreement which comes at a time when federal prosecutors are negotiating with KPMG and several of its former partners, raises the possibility that DeGiorgio may be cooperating with the government. Jeffrey C. Hoffman, a former New York City prosecutor told the LA Times that in white collar cases, âpeople who enter guilty pleas early on are the ones who wind up cooperating.â Federal prosecutors are also investigating Ernst & Young LLP, according to the Washington Post.
Law firms were also involved in the tax shelters. After developing their own tax opinion letters, according to the Senate Subcommittee on Investigations report, KPMG often sought second opinion letters supporting their position from outside law firms.
Lawyers not involved in the federal prosecution of KPMG say that it is difficult to prove that the firm committed a crime by selling the shelters, according to the New York Times. âIt's up to the prosecution to prove that they knew that this was an impermissible tax shelter,â Deborah Schenck, a tax law professor at New York University, told the Times. âIt's going to be very hard.â
Samuel W. Buell, a former prosecutor in the Enron task force of the Justice Department told the Times that an essential component of the deferred prosecution agreement, reported to be part of the discussions between federal prosecutors and KPMG âis that the person or entity that is subject to the agreement agrees at the time that the contract is entered, that the crime has been committed.â That admission allows prosecutors to reopen the case later if prosecutors decide the firm has not net the terms of the agreement, according to the Times.
KPMG is currently being sued by former clients who used tax shelters that were later determined to be âabusiveâ and now owe penalties, interest and back taxes to the Internal Revenue Service, according to the LA Times.