Archive for the ‘KPMG’ Category

Tax Roundup, 9/24/2013: The tax fairy is no cheap date. And nice words about my big mouth.

Monday, September 23rd, 2013 by Joe Kristan

Tax Shelter STARS dims in Claims Court.  The high-priced marketed tax shelter craze that started in the late 1990s by the big national accounting firms and some law firms has produced terrible results in litigation.  The latest failure is the KPMG/Sidley Austin tax shleter “STARS,” which was shot down in the Court of Federal Claims last week.

tax fairyThe shelter was designed to generate foreign tax credits against BB&T Corporation’s U.S. taxes.  While the shelter was put together by some of the biggest names in the tax profession, the judge was unimpressed:

Applying these principles here, the STARS transaction must be seen for what it really is. By creating a trust arrangement with nothing but circular cash flows, and momentarily placing funds in the hands of a U.K. trustee before it is returned, Barclays and BB&T artificially caused a U.K. tax on U.S.-sourced revenue. There was no substantive economic activity occurring in the U.K. to warrant a U.K. tax. Yet, by subjecting the Trust funds to a U.K. tax, Barclays and BB&T were able to share the benefits of foreign tax credits, which resulted in a 51 percent rebate of a Bx payment to BB&T. The surprisingly low interest rate to BB&T on the $1.5 billion Loan, 300 basis points below LIBOR, was made possible solely because of the fruits of the Trust arrangement. In reality, the U.S. Treasury is funding the monetary benefits realized by BB&T, Barclays, and the U.K. Treasury. No aspect of the STARS transaction has any economic reality.

When taxpayers got involved in tax shelters set up by big-name firms, they often did so believing that reliance on well-known national firms will protect them from penalties.  Not here:

KPMG’s overarching advice was that BB&T should engage in an economically meaningless transaction to achieve foreign tax credits for taxes BB&T had not in substance paid. Thus, because KPMG’s advice was based on unreasonable and unsupported assumptions, the Court finds KPMG’s advice unreasonable.

Based on KPMG’s recommendation, BB&T also selected the law firm of Sidley Austin, and in particular, Raymond J. Ruble, to provide tax advice and a formal opinion on STARS… Because Sidley Austin’s tax opinion was premised on the unreasonable and unsupported assumption that technical compliance with U.S. tax law would allow the IRS to give its imprimatur to an economically meaningless transaction, the Court finds Sidley Austin’s advice unreasonable.

So the judge undid $660 million in claimed tax savings and added $112 million in penalties to the bill.

The Moral?  Some of the brightest minds in the tax business thought they had finally found the Tax Fairy, the magical sprite that can make your taxes go away with fancy tax footwork.  They sold their discovery to folks just as eager to believe in the Tax Fairy as they were.  But there is no Tax Fairy.

Cite: Salem Financial, Inc., Ct. Fed. Claims, No. 1:10-cv-00192

Related: Jack Townsend,  Yet Another B***t Tax Shelter Goes Down; BB&T’s Streak on B***t Tax Shelters Continues


Iowa: an alcohol-dependent nicotine fiend with a gambling problem. From the Sioux City Journal:

In fiscal 2012, Iowa reaped $710.6 million from so-called “sin taxes.” Although that was 4.8 percent of the state’s total revenues of $14.65 billion, it was far less than the $3.7 billion in individual income taxes and $2.1 billion in sales taxes Iowans paid in fiscal 2011.

Still, it greatly exceeds the net take of Iowa’s complex, high rate and futile corporation income tax, which netted $430.4 million of the state’s $7.42 billion in tax revenues in fiscal 2012.


William Perez, Using Tax Refunds to Pay Estimated Taxes.  Applying overpayments to the next year’s estimated taxes is a very useful part of any tax planner’s toolkit.

Phil Hodgen,  Rental Income and Branch Profits Tax. “

Branch profits tax is computed on the corporation’s taxable income. The branch profits tax does not care about your net operating loss.

This means that you can have years where the corporation pays no income tax (because it has a net operating loss from the prior year that eliminates the taxable profit generated in the current year). But the corporation will pay the branch profits tax.

If you deal with offshore corporations with U.S. activity, you should read this.

Russ Fox, The Affordable Care Act and Gamblers: A Bad Bet


Janet Novack,  In Reversal, IRS Gives Amnesty To Owners Of Secret Israeli Bank Accounts   

TaxProf,  WSJ: Offshore Accounts: No Place to Hide?.  I think offshore bank secrecy is pretty much done for.

Kay Bell,  7 Internet sales tax principles set for House consideration

Peter Reilly:  TIGTA Finally Stumbles On The Real IRS Scandal   Peter seems to think cronies with undue influence on letter rulings is worth than partisans using the power of the IRS to suppress uncongenial political organizations.

TaxGrrrl,  Government Shutdown 101: What Happens When The Lights Go Off?   

Oh Goody.  Payroll Taxes May Have to Go Up (Andrew Lundeen, Tax Policy Blog).

Elaine Maag,  Senator Lee’s New Reform Plan Focuses on Young Children (TaxVox)


A scene from the heydey of Iowa energy independence.

Great moments in energy independence.  Biofuels scam ‘the largest tax fraud scheme in Indiana history’  (Biofuels International)


That would do that.  Fraud verdict tarnishes Idaho businesswoman’s bio (



News from the profession: Five  Unwritten Rules for Making Partner in a Big 4 Firm (Going Concern).  Spoiler: landing great big audit clients helps a lot.


Aw, shucks.  Tax Analysts commenter David Brunori says nice things about me today in State Tax Notes ($link):

Many practitioners are gun-shy when it comes to voicing their opinions on tax policy. They have clients, after all, who might disagree with them. Joe Kristan of Roth CPA, a leading tax and accounting firm in Iowa, is an exception. Kristan, writing for the firm’s blog, routinely speaks truth to power. We here at Tax Analysts appreciate that. 

That’s the nicest way anybody has ever said that I don’t know when to shut up.

Mr. Brunori then discusses my observations of Iowa economic policy director Debi Durham and State Senator Joe Bolkcom:

Durham talks about the tax-incentive imperative, which only the gods of crony capitalism would recognize. But then one would expect a government official who spends her time doling out government welfare to corporations to defend the idea of doling out welfare to corporations. Citing the state’s blue ribbon commission, Kristan pointed out that there is little evidence that tax incentives work.

Kristan has criticized State Sen. Joe Bolkcom (D) for arguing for targeted tax incentives. Targeted incentives violate every notion of sound tax policy and, as Kristan wisely points out, assume the state can wisely allocate investment capital. We need more people who understand how everything works to weigh in on tax policy.

I would be surprised if you could fill a coffee table at the Capitol cafeteria with legislators who could explain the opportunity costs of targeted tax credits.


Share founder learns the truth about the Tax Fairy

Thursday, January 19th, 2012 by Joe Kristan

There is no tax fairy, despite of the best efforts of big law and accounting firms a decade ago. The founder of learned the sad truth the hard way this week when the Tax Court ruled against his “OPIS” tax shelter, marketed by KPMG. The court ruled that the shelter failed to protect Scott Blum from $25.7 million in federal taxes for 1998, 1999 and 2002. It also upheld a $10.2 million penalty assessment. The TaxProf has more.
Cite: Blum, T.C. Memo. 2012-16


Failed tax shelter wrecks S corporation election

Tuesday, September 27th, 2011 by Joe Kristan

One of the products marketed by a national accounting firm in the turn-of-the-century tax shelter frenzy turns out to have cost a taxpayer a lot more than back taxes. The shelter turns out to have blown the taxpayer’s S corporation election.
KPMG marketed the “SC2” tax shelter to enable S corporation owners to have their cake and eat it too. The shelter had S corporation shareholders donate shares to a tax-exempt entity. Where the income was interest and dividends, it didn’t subject to “unrelated business income tax” and was therefore tax free. A federal judge explains what happens next:

During this period, the S corporation’s income accumulates in the corporation; distributions are minimized or avoided. After the pre-determined period of time has elapsed, the charity sells the “donated” shares back to the original shareholders. Tax has been avoided for the period of time that the shares were “parked” in the charity, and the accumulated income of the S corporation may be distributed to the original shareholders either tax-free or at the favorable long-term capital gains rate.

But what if the charity doesn’t want to sell?

The original shareholders retain control over the S corporation by donating only non-voting stock while retaining all shares of voting stock. Moreover, to protect against the possibility that the donee charity might refuse to sell its majority stock back to the original shareholders after the agreed-upon length of time, warrants are issued to the original shareholders prior to the “donation.” The warrants enable the original shareholders to purchase a large number of new shares in the corporation; if exercised, the warrants would dilute the stock held by the charity to such an extent that the original shareholders would end up owning approximately ninety percent of the outstanding shares. Thus the warrants allow the original shareholders to retain their equity interest in the corporation even though the charity nominally is the majority shareholder.

So if the charity doesn’t want to sell, the taxpayer can dilute them to insignificance.
The problem?



The Deutsche Bank Deal

Thursday, December 23rd, 2010 by Joe Kristan

Deutche Bank has settled potential charges arising out of its role in the mass marketed tax shelters of the late 1990s and early part of the last decade. The German Bank enabled many of the shelters that brought national accounting and law firms to grief. Jack Townsend explains the deal:

1. DB admits criminal wrongdoing.]
2. A payment of $553,633,153, representing DB’s total fees from its participation in tax shelter activity, the tax and interest the IRS was unable to collect from the taxpayers entering those shelters, and a civil penalty of over $149 million.
3. DB provided a detailed Statement of facts admitting its tax shelter shenanigans.
4. DB must implement and maintain an effective compliance and ethics program. Incident to this commitment, DB must install a government-appointed independent expert to oversee the program. The independent expert is Bart Schwartz of Guidepost Solutions.
5. The shelters involved, with the ubiquitous, sometimes tongue in cheek, acronyms included:
a. BLIPS (involving KPMG)
b. FLIP/OPIS (involving KPMG)
c. Short Option Strategies (SOS) (involving Jenkens & Gilchrist (Daugerdas et al), KPMG,. E&Y and others.
d. PICO and POPS (involving “various accounting firms and other entities)

In hindsight, it’s amazing that people thought this stuff would work, but it was hard for those of us who weren’t selling “product” to convince clients that the big boys were selling snake oil.


Convictions of two KPMG defendants affirmed

Monday, August 30th, 2010 by Joe Kristan

A federal appeals court upheld convictions of two of the defendants convicted in the KPMG tax shelter trial after charges against most of the defendants were thrown out. Jack Townsend, a defense attorney in criminal tax cases, thinks the circuit court shouldn’t have been so glib.
More from the TaxProf.

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Wells-Fargo SILO shelters ‘worse than KPMG?’

Tuesday, January 12th, 2010 by Joe Kristan

Jack Townsend on the Wells Fargo SILO deals shot down in the Court of Federal Claims last week:

I don’t think that these transactions are materially different than the transactions involved in the KPMG prosecutions; indeed at some level they may be worse. As I have said, criminal tax cases are all about the lie. And, there appears to have been lies in these transactions.

And that’s the nicest thing he has to say about the deals.
Prior Tax Update Coverage: Bureaucrat vs. Bureaucrat
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KPMG defendants sentenced

Thursday, April 2nd, 2009 by Joe Kristan

The defendants who were dropped from the KPMG tax shelter prosecution might feel that they dodged a bullet today after seeing the sentences imposed yesterday on the remaining defendants. The New York Times reports:

John Larson, a former senior tax manager, was sentenced to more than 10 years and ordered to pay a fine of $6 million by Judge Lewis A. Kaplan in United States District Court in Manhattan.
Robert Pfaff, a former tax partner at KPMG, was sentenced to more than eight years and fined $3 million.
A third person convicted in the case, Raymond J. Ruble, a former partner at the law firm Sidley Austin, was sentenced to six years and six months.

Thirteen defendants were excused from the case because of the efforts of the Justice Department to keep KPMG from paying their legal fees. KPMG itself was not prosecuted, but had to shed chunks of its tax practice as part of its deferred prosecution agreement.


Three KPMG convictions; one acquittal

Wednesday, December 17th, 2008 by Joe Kristan

Guilty on tax evasion counts, reports the Wall Street Journal:
Robert Pfaff, John Larson (former KPMG); Raymond Ruble (former Brown & Wood lawyer)
Not guilty on all counts: David Greenberg (former KPMG).
Thus ends the big KPMG tax shelter case that resulted in the forced divestiture of much of KPMG’s business, the embarassment to the Government of the dismissal of charges against 13 defendants, and changes in the way white-collar prosecutions are to be handled.
Full Tax Update coverage here.
UPDATE, 12/18: The TaxProf has a roundup.


Dismissed KPMG defendants officially off the hook

Wednesday, December 3rd, 2008 by Joe Kristan

The case against the 13 KPMG defendants whose cases were thrown out by the trial judge quietly has come to the end when the government declined to ask for Supreme Court review. The Tax Prof has a roundup. The judge dismissed the charges as a result of efforts by the prosecution to keep KPMG from paying the defendants legal costs.
The case against the remaining four defendants continues.


KPMG Trial under way

Thursday, October 16th, 2008 by Joe Kristan

The trial of the four remaining KPMG tax shelter defendants got going yesterday. The defendants will call it tax planning; the government will call it fraud. If the government shows that the shelters were built on transactions that never happened, that will be bad news for the defense. If the shelter transactions actually happened and the paperwork wasn’t faked, the defendants should have a good shot at acquittal.
The TaxProf has a roundup.