Court Rejects Tax Shelter Tied to KPMG
By David Reilly and Paul Davies
The Wall Street Journal
Friday, February 2, 2007
In a significant decision regarding the validity of a tax
shelter at the heart of a criminal trial involving former
KPMG LLP executives, a federal judge in Texas hearing a
separate civil suit found the structure was a sham that
"lacked economic substance."
Although the ruling doesn't directly affect the criminal
case being heard in New York, it backs up prosecutors'
arguments that the shelters were an elaborate tax dodge and
supports a similar and long-standing contention by the
Internal Revenue Service.
The decision, handed down Wednesday by U.S. District Judge
T. John Ward, follows a ruling last April by a U.S. Tax
Court Judge that upheld IRS arguments that a similar shelter
The Texas decision was particularly significant for the IRS
because Judge Ward ruled that loans and an investment
strategy underlying the tax shelter, called Bond Linked
Issue Premium Structure, or BLIPS, lacked economic substance
and were undertaken only to create tax losses.
Yesterday, Don Korb, IRS chief counsel, said the agency was
pleased by the Texas decision.
Jerry Cohen, an attorney with Sutherland Asbill & Brennan
LLP who represented two individuals who fought the IRS's
challenge of their use of the BLIPS product for tax
purposes, said the decision was a mixed bag for his
clients. They were pleased the judge struck down IRS
requests to assess penalties, but disappointed the judge
declared the BLIPS product invalid and required them to pay
tax owed and interest.
The BLIPS shelter is one of four at issue in the criminal
case pending in federal court in Manhattan against 16 former
KPMG executives and two individuals who worked at outside
firms. Prosecutors claim the shelters were designed to
create phony paper losses to help wealthy individuals evade
billions of dollars in tax.
A spokeswoman for the U.S. attorney's office in Manhattan,
which is overseeing the criminal probe, declined to comment.
Joseph Bankman, a tax-law expert at Stanford University law
school, said the ruling wouldn't directly give prosecutors
ammunition. But the Texas decision robs defense attorneys
in the coming New York trial of a chance to argue that a
federal judge had found that the structure had merit.
The individuals in the criminal case, who have all pleaded
not guilty, are scheduled to stand trial in September. KPMG
in August 2005 entered into a deferred-prosecution agreement
with the government, in which it admitted that the tax
shelters it sold, including BLIPS, were improper.
KPMG wasn't a party in the Texas case. Rather, that
litigation involved the sale of a BLIPS structure to two
prominent attorneys, Cary Patterson and Harold Nix, by
investment firm Presidio Advisory Services LLC.
Presidio worked with KPMG to sell BLIPS and executives
connected to Presidio are among those facing criminal
charges in New York.
The IRS challenged the validity of more than $50 million in
tax losses claimed by Messrs. Patterson and Nix as a result
of their investment in BLIPS, saying they owed the taxes,
interest and penalties.
The attorneys sued the government, contending they believed
the structure was above board and they had relied on outside
tax experts in using it and taking subsequent losses on tax
Judge Ward sided with the attorneys' claims that they hadn't
entered into the BLIPS products with tax losses in mind, but
still found that the shelters lacked economic substance.
Write to David Reilly at
and Paul Davies at