Family Sues KPMG Over Tax Shelter Fraud
The family that founded the manufacturer Arrow Fasteners Co. has accused the accounting firm KPMG of selling a fraudulent tax shelter scheme that lost the family millions of dollars.
A suit filed against KPMG by nine Abrams family trusts and four family members say they paid $32 million for a shelter designed to create paper losses that would reduce their taxes, including those on income from the sale of Arrow in 1999.
The shelter did not reduce their taxes and instead the IRS disallowed it and audited the family and trusts, which incurred “tens of millions of dollars in tax liabilities” that could otherwise have been “minimized or deferred,” the suit says.
The suit accuses KPMG of fraud, breach of contract, and malpractice. It makes similar claims against the law firm Sidley Austin Brown & Wood, which helped KPMG to create the tax shelters. The two companies concocted a “fraudulent scheme” designed to “line their own pockets with millions of dollars of fees at the expense of their clients in blatant disregard of law and professional ethics,” the suit claims.
The suit is part of a wave of lawsuits and investigations that focus on tax shelters created and sold by KPMG in the late 1990s and early 2000s.
In June, KPMG released a statement confirming reports that its tax shelter business was under investigation by the U.S. Justice Department. The statement acknowledged there had been “unlawful conduct” by KPMG partners now departed form the company, saying that it took “full responsibility” for the problems.
Several investors who bought tax shelters from KPMG have filed suit. Published reports also indicate that the Justice Department is studying whether to prosecute the firm, a conviction that would mean its closure or merely fine it and indict some partners.
The suit is based on a 2003 report on KPMG’s tax shelter business by the U.S. Senate Committee on Governmental Affairs. It found KPMG had developed, marketed and implemented “highly questionable or illegal tax products,” which cost the U.S. Treasury “billions of dollars in lost tax revenue.”
The family is seeking compensation for the fees paid for the shelter, any penalties paid by Arrow, and an amount equal to the savings that KPMG promised.
The suite gives the following account:
Around the time that KPMG gave the Abrams family advice on the sale of the company, the accounting firm also began promoting the tax shelter.
The shelter was designed to enable the family and trusts to show a loss of $330 million to the IRS through a series of financial maneuvers involving several specifically created limited liability companies. The shelter was called Bond-Linked Premium Structure (BLIPS), the suit says.
The Abrams family says in court papers that it was assured by KPMG that the strategy was sound and legitimate. Family members say the accounting company told them that a respected, independent law firm would review the shelter and give a written opinion that it would “more likely than not” withstand a court challenge from the IRS.
The family says it was told by KPMG that the worst-case scenario resulting from an IRS challenge is that it would have to pay 70 percent of the tax owed, an amount that would still mean it saved more than it paid for the shelter. The family was convinced and in September 1999 bought the shelter, paying KPMG, Westminster Bank, and Brown & Wood a total of $23 million in fees.
As intended, the shelter created a paper loss of $330 million, but in 2000, the IRS concluded that the BLIPS tax shelter was a “potentially abusive tax shelter” and began investigating companies that used it.
The Abrams family and trusts have since paid the IRS penalties of hundreds of thousands of dollars.
Reference:
“Family: Tax Shelter was fraud,” NorthJersey.com, Hugh R. Morley, August 2005.