KPMG tax shelter case: another guilty plea

Another defendant in the giant KPMG tax shelter case has pleaded guilty and agreed to cooperate with prosecutors in their case against the remaining defendants.  The plea deal was announced yesterday for David Amir Makov.  Makov was a partner, with two former KPMG employees, in Presidio Advisory Services which promoted and sold so-called "BLIPS" or "bond linked issue premium structures" tax shelters to rich investors.  The Presidio partners also sheltered income with BLIPS deals. 

The BLIPS deals used partnership structures and artificially inflated bases to generate artificial losses for investors that would offset genuine gains and thereby reduce investors taxes.  Proving just how arcane many of these tax shelters are in their use of technical rules to create the desired tax outcome, Makov was apparently able to explain the way the BLIPS shelter worked in an intelligible manner, whereas the New York Times notes that the judge overseeing the KPMG trial has complained at previous hearings that the prosecutors have been unable to clearly explain how the BLIPS shelter purportedly worked.  See Lynnley Browning, Guilty Plea Seen Aiding Tax Shelter Prosecution, NY Times, Sept. 11, 2007.

Makov's plea is significant for another reason.  He explicitly states that there was no economic substance to the BLIPS deal, and that the purported loan did not involve any amount at risk.  The promoters merely "created the appearance of economic substance, rather than the reality."  Id.   The "sole purpose" of the shelter was to generate losses.  See Paul Davies, Defendant in KPMG Case Pleads Guilty, Agrees to Cooperate, Wall St. J., Sept. 11, 2007, at A16.   

It is appropriate that this kind of language be picked up in the press, so that the jaundiced view reflected in some courts against the application of the economic substance doctrine can wither away to a deserved natural death.  The economic substance judicial doctrine is, in fact, courts doing what they must do--exercising their interpretive skills to ensure that laws are upheld rather than mocked.