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Confidence Games

Confidence Games: Lawyers, Accountants, and the Tax Shelter Industry

Tanina Rostain
Milton C. Regan
Copyright Date: 2014
Published by: MIT Press
Pages: 424
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  • Book Info
    Confidence Games
    Book Description:

    For ten boom-powered years at the turn of the twenty-first century, some of America's most prominent law and accounting firms created and marketed products that enabled the very rich -- including newly minted dot-com millionaires -- to avoid paying their fair share of taxes by claiming benefits not recognized by law. These abusive domestic tax shelters bore such exotic names as BOSS, BLIPS, and COBRA and were developed by such prestigious firms as KPMG and Ernst & Young. They brought in hundreds of millions of dollars in fees from clients and bilked the U.S. Treasury of billions in revenues before the IRS and Justice Department stepped in with civil penalties and criminal prosecutions. InConfidence Games, Tanina Rostain and Milton Regan describe the rise and fall of the tax shelter industry during this period, offering a riveting account of the most serious episode of professional misconduct in the history of the American bar. Rostain and Regan describe a beleaguered IRS preoccupied by attacks from antitax and antigovernment politicians; heightened competition for professional services; the relaxation of tax practitioner norms against aggressive advice; and the creation of complex financial instruments that made abusive shelters harder to detect. By 2004, the tax shelter boom was over, leaving failed firms, disgraced professionals, and prison sentences in its wake. Rostain and Regan's cautionary tale remains highly relevant today, as lawyers and accountants continue to face intense competitive pressure and regulators still struggle to keep pace with accelerating financial risk and innovation.

    eISBN: 978-0-262-32316-1
    Subjects: Economics, Law

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Acknowledgments and Note on Sources
    (pp. ix-xii)
  4. Introduction
    (pp. 1-8)

    In late 1999, an unmarked manila envelope arrived at the U.S. Department of the Treasury.¹ The appearance of a mysterious envelope at the Treasury was not uncommon at that time. Every once in a while, Treasury officials would receive a parcel containing the prospectus for a complicated tax evasion strategy. They assumed that the documents came from tax professionals who had been shown the materials by a client or had come across them at work. These professionals, worried that the Internal Revenue Service might never discover the tax ploy, wanted to alert the agency so that it could close down...

  5. Part I Shelters Rising

    • 1 The IRS under Siege
      (pp. 11-24)

      In September 1997, Senator William Roth (R, Delaware) opened Senate hearings on alleged misconduct at the IRS by announcing his outrage at what the Committee had uncovered during its investigation of the agency. “Over the course of the next days,” he said, “we are going to see a picture of a troubled agency, one that is losing the confidence of the American people, and one that all too frequently acts as if it were above the law. This is unacceptable.”¹

      The hearings painted a portrait of a powerful agency run amok. Senators heard from various taxpayers about abuses they claimed...

    • 2 Why Tax Shelters Matter
      (pp. 25-44)

      Abusive tax shelter activity at the turn of the twenty-first century cost the U.S. Treasury billions of dollars and sent a number of lawyers and accountants to prison. To appreciate the complexity of the problem of abusive shelters, it is important to understand what a tax shelter is and what in principle distinguishes a legitimate shelter from an abusive one. Understanding this fundamental distinction is critical to appreciating exactly what happened in the most recent tax shelter wave and in assessing the extent to which the tax system remains vulnerable to new types of abusive tax shelters. A basic difficulty...

    • 3 Gimme Shelters
      (pp. 45-74)

      The need for the IRS to focus more on collection and less on enforcement in the late 1990s could not have come at a worse time. Corporate taxpayers had growing incentives to eliminate or at least reduce tax liabilities as much as possible, while an emerging class of the superrich expanded individual demand for shelters. At the same time, accounting firms, financial institutions, and law firms all faced intensified competitive pressures that made the development of mass-marketed tax shelters a very attractive line of business. Unlike the 1980s, tax promoters could now rely on sophisticated financial instruments to construct shelters...

  6. Part II Accounting Firms

    • 4 The Skunk Works
      (pp. 77-102)

      The emergence of KPMG paralleled that of the other major accounting firms. Its predecessor firm, Peat Marwick, was founded in 1911 and specialized in providing audit and tax services to banking and financial institutions. During the 1950s, the firm was the most aggressive and innovative of the Big Eight, emerging as the largest and highest grossing accounting firm in the United States.¹ The firm grew by rapidly buying up small firms and expanding its consulting services. In 1987, Peat Marwick joined forces with a second-tier firm to become KPMG Peat Marwick, at the time the biggest accounting firm in the...

    • 5 Watson’s Choice
      (pp. 103-132)

      As sales of the Offshore Portfolio Investment Strategy (OPIS) were winding down in 1998, leaders of KPMG’s Personal Financial Planning (PFP) group were eager to find another product with similar revenue potential. Bond-Linked Issue Premium Structure, known under the acronym BLIPS, looked very promising. Two California lawyers, Emil Pesiri (who had been involved earlier with Son of BOSS shelters) and George Theofel, had thought up the idea for BLIPS and licensed it to Presidio, John Larson and Robert Pfaff’s investment firm. BLIPS, like the earlier shelters Pesiri had done with Daugerdas in the mid-1990s, was a type of Son of...

    • 6 Accounting for Fraud
      (pp. 133-154)

      KPMG was not the only firm among the then Big Six to play a major role in the tax shelter industry. Ernst & Young (E&Y) was eager to participate too. PricewaterhouseCoopers (PwC) was involved but withdrew after it was publicly embarrassed during Congressional hearings. Arthur Andersen was active, but its demise in the wake of the Enron debacle limited the amount of information about its shelter activities that came to light. Only Deloitte Touche remained unscathed. Although that firm was described in Janet Novack and Laura Sanders’s 1998 article in Forbes as a tax shelter promoter, no official account of...

    • 7 Dances with Wolves
      (pp. 155-174)

      In March 1999, the accounting firm BDO Seidman was struggling. Founded as Seidman and Seidman in New York in 1910, the firm expanded a few years later to Grand Rapids, Michigan, to serve the furniture industry, for which it developed the first furniture plan costing system. The firm developed a strong presence in the Midwest and opened additional offices on the East Coast. Former managing partner L. William Seidman had served as chair of the Federal Deposit Insurance Corporation from 1985 to 1991 and had played a lead role in liquidating hundreds of failed savings and loan associations that had...

  7. Part III Law Firms

    • 8 The Texas Juggernaut
      (pp. 177-216)

      In January 1998 theNational Law Journalran a front page article celebrating the rapid ascent of the Dallas-based law firm Jenkens & Gilchrist. Under the leadership of its chief executive David Laney, the firm had grown over the preceding three years from 160 to 340 lawyers. The article identified Jenkens as the fastest-growing law firm in the United States and described it as a “juggernaut.”¹ The article noted the firm’s addition of practice groups from other firms as the basis for its growth, saying that Laney “inspired these lawyers to dream Texas-size dreams.”² It suggested that “being rewarded for...

    • 9 Lowering the Bar
      (pp. 217-240)

      The tax shelter crisis almost certainly generated the largest number of criminal prosecutions against lawyers in connection with any set of events in United States history. At least twenty-nine lawyers were charged in an indictment or criminal information for their work on abusive tax shelters. Some were involved in private practice, while others worked in accounting or financial services firms. Eight were convicted, eleven pled guilty, two were acquitted, two had their convictions reversed on appeal, one is a fugitive from justice, and five had their indictments dismissed when KPMG terminated payment of their attorneys’ fees at the behest of...

  8. Part IV The Reckoning

    • 10 Turning the Tide
      (pp. 243-272)

      At the close of Congressional hearings in 1998, the Internal Revenue Service was on the ropes. Its credibility was low, its employees’ morale even lower, and there was skepticism that the agency could competently perform even its basic function of collecting taxes. Its difficulties ran even deeper: the IRS was a tax collection agency in an era in which there was acute hostility toward the very idea that the tax system had legitimacy. The blistering Congressional criticism of the IRS had left it chastened and cautious—just as trends were converging that would dramatically increase efforts to design and market...

    • 11 The Government Closes In
      (pp. 273-296)

      When the Internal Revenue Service announced in December 2001 that taxpayers who had engaged in questionable shelters could escape penalties if they disclosed their participation to the agency by the following April, Representative Lloyd Doggett (D, Texas) criticized the IRS action as “all carrot and no stick.”¹ The stick was soon to come in the form of IRS enforcement actions against major accounting firms, law firms, and advisory boutiques to require them to disclose the identity of taxpayers who had participated in shelters, soon to be followed by Congressional hearings, criminal investigations, and prosecutions.

      By spring 2002, the IRS had...

    • 12 Endgame: KPMG and Jenkens
      (pp. 297-324)

      KPMG’s extensive tax shelter operations began to catch the eye of the IRS in 2000. By the end of that year, the agency was aware that the accounting firm had been involved in both OPIS and FLIP shelters. In October 2001, the IRS informed KPMG that it was beginning an audit, and in December it issued an information document request to the firm. KPMG claimed that client confidentiality concerns prevented it from providing the documents described in the request but indicated that the firm would comply with a request for documents set forth in an administrative summons. The IRS issued...

  9. Conclusion
    (pp. 325-350)

    In the mid-2000s, the tax shelter industry had begun to slow down. By then a significant number of well-respected professional organizations and individuals had been drawn into the criminal justice system. To fight shelter activity, the government deployed every weapon in its regulatory arsenal—strengthening provisions in the Internal Revenue Code, enacting new regulations, challenging claims on audit, offering time-limited amnesties to taxpayers, bringing enforcement actions against firms, and ultimately launching criminal investigations and prosecutions of firms and individual tax practitioners. As evidence of the role of prestigious accounting firms and law firms mounted, the abusive tax shelter market emerged...

  10. Notes
    (pp. 351-394)
  11. Index
    (pp. 395-408)