KPMG sued over alleged tax scam

Tax advisers sued $18M tax-shelter plan was 'disastrous'
By George Erb
Puget Sound Business Journal (Seattle) Jun. 23 —

A Seattle businessman has accused Big Four accounting firm KPMG LLP and other defendants of peddling a "sham" tax-shelter scheme
that cost him millions of dollars in fees and exposed him to federal tax audits and penalties.

<snip>

Now, his lawsuit contends that KPMG and its business partners violated federal racketeering laws, committed fraud and broke state
consumer-protection laws, among other things. Swartz is seeking more than $25 million in damages and attorneys fees.

<snip>

Swartz founded and ran TCS Expeditions Inc., a company that operated luxury travel excursions to exotic locations. In 1999, court
records show, Swartz sold his interest to Operating Educational Travel Programs Inc., leaving him with a potential capital gain of
$18 million on his 1999 tax return.

His brokerage firm referred Swartz to KPMG for tax advice, and Swartz was soon contacted by a partner in the accounting firm's
office in Mountain View, Calif.

According to the lawsuit, the partner told Swartz that KPMG and the former Brown & Wood law firm had developed a legal
strategy for greatly reducing or eliminating taxes on large capital gains by using a procedure dubbed "BLIPS."

Swartz agreed to the strategy, which consisted of forming a temporary limited liability company that lost money on foreign
currency options deals, thereby offsetting the capital gains from the sale of his company.

His tax advisers allegedly orchestrated a loss of $17.9 million in 60 days by using a line of credit attached to the
temporary company and dissolving the company at a precise time, according to the complaint. The size of the loss was determined in
advance.

Afterward, KPMG and the Brown & Wood law firm, which later merged with Sidley Austin, gave Swartz opinion letters that
said the procedure was legal, and that he could claim $18.2 million in capital losses on his 1999 tax returns.

Swartz first learned that something was amiss the following year, when he asked another accounting firm, Seattle-based
Moss Adams LLP, to prepare his tax returns. Moss Adams questioned the legitimacy of the tax strategy, citing a notice issued by
the IRS in 2000.

The IRS notice, 2000-44, referred to a similar notification in 1999 and said taxpayers can only deduct "bona fide" losses
that are a result of "actual economic consequences." The notice went on to say, "An artificial loss lacking economic substance is
not allowable."

Two months later, KPMG told Swartz that the IRS might disallow his BLIPS transaction. At that point, Swartz asked the
accounting firm to cancel the tax shelter and refund his money, but KPMG refused, according to the complaint.

Last year, KPMG told Swartz that the firm might have to give the IRS names of clients who used the tax shelter, a move
that would almost certainly put his 1999 tax returns under greater scrutiny.

<snip>

http://famulus.msnbc.com/famuluscom/...4.asp?bizj=SEA

An interesting case.

Jim Hudspeth

"Jim Hudspeth" <jdhcpa@att.(NO_SPAM)net> wrote
> Tax advisers sued $18M tax-shelter plan was 'disastrous'
> By George Erb
> Puget Sound Business Journal (Seattle) Jun. 23 —
>
> A Seattle businessman has accused Big Four accounting
> firm KPMG LLP and other defendants of peddling a
> "sham" tax-shelter scheme that cost him millions of dollars
> in fees and exposed him to federal tax audits and penalties.
>
> <snip>
>
> Now, his lawsuit contends that KPMG and its business
> partners violated federal racketeering laws, committed
> fraud and broke state consumer-protection laws, among
> other things. Swartz is seeking more than $25 million in
> damages and attorneys fees.
>
> <snip>
>
> Afterward, KPMG and the Brown & Wood law firm,
> which later merged with Sidley Austin, gave Swartz
> opinion letters that said the procedure was legal,

> Two months later, KPMG told Swartz that the IRS might
> disallow his BLIPS transaction.
>
> Last year, KPMG told Swartz that the firm might have to
> give the IRS names of clients who used the tax shelter,
> a move that would almost certainly put his 1999 tax
> returns under greater scrutiny.
>
> <snip>
>
> http://famulus.msnbc.com/famuluscom/...4.asp?bizj=SEA
>
> An interesting case.


And another nail in the coffin of the accounting profession thanks to the
"big" mentality.

About 10 years ago I decided that the "big" firms were trying to demolish
the little firms. The only way they can do it is by destroying the
industry. And it looks like they will succeed at that.

I was on the phone yesterday with a potential non-profit client (still
waiting on that profitable client ;-)), and I mentioned to her that the
organization should have an accountant and an auditor that are from separate
firms.

That, in my opinion, is where things are headed, and where things should
have been from the get-go.


--
Paul A. Thomas, CPA
Athens, Georgia

On Wed, 25 Jun 2003 09:41:40 -0400, "Paul A. Thomas" <> wrote:
>
>
> I was on the phone yesterday with a potential non-profit client (still
> waiting on that profitable client ;-)), and I mentioned to her that the
> organization should have an accountant and an auditor that are from separate
> firms.
>
> That, in my opinion, is where things are headed, and where things should
> have been from the get-go.
>

I completely agree.

The larger problem, at least in my world, has and continues to be a high level of distrust among accountants. We all seem to be
afraid of being displaced by another accountant.

Very unprofessional, in my opinion.

Jim Hudspeth

If you are like me, you get a couple of mailers a month to get your Series 7
license (or some nonsense) to get in to financial management with your
clients for a fee. My guess is that in the not so distant future, we'll
hear about CPA's that have given bad investment advice, or put their clients
in some investments that (God forbid) increases their tax prep fees.

So between the AICPA (in conjunction with the Big few) and the Congress
critters trying to end accounting as a profession, and the folks that want
us to stop accounting and tax work to become financial planners, there seems
to be very little support for accounting as a profession.

But I suppose it's time for this profession to be the whipping boy for a
while.

My guess is in the next five years of so, there'll be another profession
that gets pummeled by the press, Congress and the public.


--
Paul A. Thomas, CPA
Athens, Georgia

"Paul A. Thomas" wrote:
>
> "Jim Hudspeth" <jdhcpa@att.(NO_SPAM)net> wrote
> > Tax advisers sued $18M tax-shelter plan was 'disastrous'
> > By George Erb
> > Puget Sound Business Journal (Seattle) Jun. 23 —
> >
> > A Seattle businessman has accused Big Four accounting
> > firm KPMG LLP and other defendants of peddling a
> > "sham" tax-shelter scheme that cost him millions of dollars
> > in fees and exposed him to federal tax audits and penalties.
> >
> > <snip>
> >
> > Now, his lawsuit contends that KPMG and its business
> > partners violated federal racketeering laws, committed
> > fraud and broke state consumer-protection laws, among
> > other things. Swartz is seeking more than $25 million in
> > damages and attorneys fees.
> >
> > <snip>
> >
> > Afterward, KPMG and the Brown & Wood law firm,
> > which later merged with Sidley Austin, gave Swartz
> > opinion letters that said the procedure was legal,
>
> > Two months later, KPMG told Swartz that the IRS might
> > disallow his BLIPS transaction.
> >
> > Last year, KPMG told Swartz that the firm might have to
> > give the IRS names of clients who used the tax shelter,
> > a move that would almost certainly put his 1999 tax
> > returns under greater scrutiny.
> >
> > <snip>
> >
> > http://famulus.msnbc.com/famuluscom/...4.asp?bizj=SEA
> >
> > An interesting case.
>
> And another nail in the coffin of the accounting profession thanks to the
> "big" mentality.
>
> About 10 years ago I decided that the "big" firms were trying to demolish
> the little firms. The only way they can do it is by destroying the
> industry. And it looks like they will succeed at that.
>
> I was on the phone yesterday with a potential non-profit client (still
> waiting on that profitable client ;-)), and I mentioned to her that the
> organization should have an accountant and an auditor that are from separate
> firms.
>
> That, in my opinion, is where things are headed, and where things should
> have been from the get-go.
>

Noble sentiment.

In the real world you would, of course, get bumped out of the single
function engagement by the "professional" shop that can offer the
"one-stop" package.

--
*****************************************
Boycott list:

Belgium, France, Germany, Finland, Sweden, Switzerland, China, Iran,
Syria,
Hollywood, San Francisco, Massachusetts, New York City, Sierra Club,
ACLU,
Movies of the first blacklist, Turner, Madonna, S. Crowe, Dixie Chicks,
Cher, U2, rapp,
Trudeau, Wiley, Disney, ABC news, CBS news, NBC news, CNN, PBS,

Sometimes the only influence you have is to say, "No, I'm not buying."

"Ron Todd" <> wrote
> In the real world you would, of course, get bumped out of the single
> function engagement by the "professional" shop that can offer the
> "one-stop" package.



One-stop shopping where you mix audit services with almost any other form of
accounting, financial or management services is a dying dog. As long as the
books can be cooked, and you're the chef, the guy that picks out the menu,
the food critic, the dishwasher, the health inspector, and the patron,
there's tons of room for trouble.

We never intended for the government to set the standards for us
accountants, but that's where we're headed.

The only unknown is, how much this will cost us.


--
Paul A. Thomas, CPA
Athens, Georgia

On Wed, 25 Jun 2003 12:48:01 -0700, Ron Todd <> wrote:
>
> In the real world you would, of course, get bumped out of the single
> function engagement by the "professional" shop that can offer the
> "one-stop" package.
>

The days of the "one-stop" shop may soon be over.



> Boycott list:
>
> Belgium, France, Germany, Finland, Sweden, Switzerland, China, Iran,
> Syria,

Just how do you go about boycotting countries?

For whatever it is worth, my children's ancestors hailed from three of the above list (among others), and I have friends from / in
most of the others, specifically including Finland. In fact, there is a place near where I live called Finn Hill. The reason it is
called Finn Hill is because it is populated mostly by people whose ancestors were once Finlanders. Most of them are very nice
people.

Jim

One more excellent illustration why certifying auditors should be
prohibited from doing tax work for the same client. Up to now the SEC
has failed to ban this blatant conflict of interests.

A. Lucien Meyers, CIA, CMA
--
If you receive this by error, please delete it and inform the sender.
PGP key fingerprint=F1C0 D9AE 1B18 1405 4DFA B4CC 6DC7 FF78 C76E FB15
To Big Brother Echelon from "spook":
sentiero Iraq Khaddafi Bush AK-47 SDI Semtex Arafat radar KGB Treasury

On Thu, 26 Jun 2003 10:48:36 +0200, A. L. Meyers <> wrote:
> One more excellent illustration why certifying auditors should be
> prohibited from doing tax work for the same client. Up to now the SEC
> has failed to ban this blatant conflict of interests.
>

KPMG was not a certifying auditor in this case - Swartz was not an audit client.

For an even more interesting case that very clearly illustrates your point, read the following:


http://www.boston.com/dailyglobe2/17...ignment+.shtml

This issue could very well bring down KPMG. If so, I will not be surprised. I expected to see KMPG go down before Andersen.

Jim Hudspeth

--
output = reverse("gro.gultn" "@" "enworbbc")
http://www3.sympatico.ca/cbbrowne/emacs.html
"But what....is it good for?" -- Engineer at the Advanced Computing
Systems Division of IBM about the microchip. 1968