A surprise development in the KPMG tax shelter case: one of the 17 KPMG partners indicted on criminal charges (along with attorney R.J. Ruble and an investment banker) has pled guilty to tax evasion and conspiracy and will cooperate with the government in making its case against the others. The New York Times carried the story on David Rivkin's change of heart today, here.
As the story indicates, the KPMG shelters at issue created artificial losses of about $11 billion and enabled KPMG's clients to avoid taxes of about $2.5 billion. Rivkin was a partner in the firm's "innovative strategies" group that developed and promoted tax avoidance transactions. The indictment accuses the group of
"devising, marketing, and implementing fraudulent tax shelters, by preparing and causing to be prepared, and filing and causing to be filed with the I.R.S. false and fraudulent U.S. individual income tax returns containing the fraudulent tax shelter losses, and by fraudulently concealing from the I.R.S. those shelters." Id.
The Times reports that Rivkin admitted signing opinion letters for clients that Rivkin knew to be false: the letters state that the tax benefits claimed for the transactions promoted by KPMG were "more likely than not" (MLTN) to be upheld. Under the tax code, a taxpayer may be able to avoid penalties for a position taken on a return that is ultimately found not to have been proper if the taxpayer relied on an expert opinion. For potentially abusive transactions, opinions can provide penalty protection only if the level of confidence is at least MLTN. Rivkin also admitted that he marketed shelters that were intended "to allow wealthy taxpayers to claim phony losses." See here.
In an article to be published by the Virginia Tax Review, I suggest that the level of confidence required for taking or advising a position on a return should be raised uniformly to the MLTN standard from the current low litigation-based standards. Rivkin's statements demonstrate that raising the standards, by itself, will not be sufficient to curb aggressive transactions. Tax practitioners like Rivkin may simply be too greedy for the millions in fees that can be made from offering a letter at the "right" level of confidence. Something more will be required to encourage the development of a tax practitioner norm that is not exclusively focused on avoidance of taxes. Greater transparency--such as eliminating confidentiality of public corporation's returns or at least of redacted portions of returns--may help curb aggressive corporate transactions. For wealthy individuals where releasing the return may not be politically feasible, it may be necessary to raise penalties, enhance enforcement resources so that more face-to-face audits are conducted, and restrict or eliminate the application of evidentiary privileges.
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