The Thin Line Between Tax Planning and Tax Fraud: The KPMG Individual Conspiracy Indictment (U.S. v. Stein et al.)

The indictment of nine individuals for conspiracy to defraud the IRS is available from Findlaw here.  It is a single-count indictment, although it covers both the tax shelters and an allegation of obstruction of the IRS and Senate investigation of KPMG in 2003.  The nine defendants are:

Jeffrey Stein, former vice chairman of tax services and then #2 at the firm; John Lanning, former vice chairman of tax services; Richard Smith, former vice chairman in charge of tax; Jeffrey Eischeid, former partner-in-charge of KPMG's Personal Financial Planning group (through which the tax shelters were sold); Philip Wiesner, former partner-in-charge of the Washington National Tax group; John Larson and Robert Pfaff, former KPMG partners in San Francisco who formed two limited liability companies that served as the investment adviser for the tax shelter program; R.J. Ruble, a former partner at Sidley Austin Brown & Wood who provided the opinion letters on the tax shelters at $50,000 per (the only non-KPMG defendant named in the indictment).

In addition to Ruble, five of the eight KPMG partners were lawyers (Stein, Smith, Wiesner, Larson, and Pfaff).

While the indictment goes into some detail about the various tax shelters (BLIPS, FLIP/OPIS), the crux of the indictment seems to be the hiding of the status of the shelters, such as the failure to register with the IRS.  Moreover, at least one allegation is aimed at Eischeid for trying to obstruct the Senate investigation of the tax shelters in his testimony by taking the approach (according to an internal KPMG e-mail) of "to be forgetful.  And so the record will reflect repeated 'I don't knows,' 'I don't recalls,' and 'I was out of the loops' -- the rope-a-dope/Enron defense."  When in doubt, invoke Enron.

For the government to succeed in this case, I think they have to focus on the hiding and not get into a fight about whether the shelters were proper.  That is easier said than done because at some point the nature of the shelters will have to be discussed, and it may be in the defendants' favor that getting a clear explanation of what is (and is not) acceptable tax planning is almost impossible to state simply.  These were top-drawer tax partners, leaders in the field, so a fight on the technicalities would probably favor the defendants.  To the extent there is hiding of the details of the shelters to avoid a full review of their legality, the government will have an easier case.  If any of the defendants agrees to cooperate and provide testimony about steps taken to hide the real nature of the shelters, that would assist the government significantly. Regardless, this prosecution will be a test of whether anyone can identify the thin line between tax advice and tax fraud. (ph -- thanks to ProfBlog Leader Paul Caron for passing along the indictment, and all the relevant documents related to the KPMG case are available on the TaxProf Blog here).