ࡱ> ;=:` F'bjbj ..Fpd  """"""$Wh!F` ` ` F [ `    `   JV v R q0 {" {" {" l Z5 @ u 4 FF  ` ` ` ` D4J"l A VERY STRANGE SUPERSCEDING INDICTMENT So now we have a new indictment in the KPMG tax case. It is filled with much fire and brimstone and vitriol, but it is again short on substance. The indictment seems to express anger not just at the defendants for marketing and facilitating abusive tax shelters, but also seems to again directly confront Congress for its failure to conclusively deal with these shelters. And now added to the list of targets for complaints by the Justice Department, is the Supreme Court of the United States. The main thrust of the indictment is that the defendants conspired to violate the tax evasion and tax perjury provisions of the Internal Revenue Code. There has also been added to conspiracy claims, substantive tax fraud claims mirroring the conspiracy claims. Tax evasion requires some demonstration that the underlying tax returns were knowingly wrong. It is not at all clear from the indictment why the Justice Department believes these returns were wrong. Other than repeating again and again that the claimed losses were phony, there is no explanation of what was phony about them. It appears that the challenged transactions still involved real securities transactions. The argument against the appropriateness of the claimed losses is not, as a general matter, that real transactions did not take place but there was no expectation of profit as there was no intent to maintain the investment for a long enough time or take sufficient risk to allow for possibility of gain. Thus, it appears, that the Government is mostly relying, as it did in the prior indictment, on the business purpose doctrine to support the substance of its complaints. The problem is that the business purpose doctrine, under established Supreme Court precedent, is likely not the proper basis for a tax fraud indictment. The prior indictment seemed to be an expression of frustration by the Department of Justice at the failure of Congress to act to affirmatively and clearly deal with tax shelters. This indictment restates that frustration but also seems to be a direct challenge to the Untied States Supreme Courts decision in Cheek v United States. Prior to the decision in Cheek, it was the view of the Courts and the Justice Department that tax fraud could exist if the taxpayer entered into a transaction solely for tax purposes and without economic substance. Economic substance was thought to be lacking if the transaction had no business purpose and involved no market risk. A defense based on the notion that the taxpayer believed it was proper to enter into such transactions was unavailing and taxpayers were indicted and convicted for tax fraud without regard to their subjective belief. In Cheek, the Supreme Court of the United States concluded that tax fraud could not arise under any circumstance where the taxpayer believed that his view of the law was correct. In other words, disagreements about the law, no matter how preposterous or silly, could not be the basis of a tax fraud prosecution. After Cheek any objective standard for tax fraud was replaced by a subjective standard. The issue is no longer a question of the view of the taxpayer about profit motive, business purpose and market risk, but now the issue is whether the taxpayer believed that the law allowed him to file the tax return in the manner presented. Many people in the academy and in the Justice Department have expressed extreme frustration at the Cheek decision and its consequences. But most thought that since the Supreme Court has spoken, the issue was put to rest. Apparently, this Justice Department takes a different view and has decided to ignore the Cheek opinion and return to the rules which existed prior to Cheek. The superseding indictment is based on the notion that the shelter transaction lacked economic substance and were entered into solely for tax purposes. The language of the indictment, using as it does such notions as phony losses, is an attempt to return to the pre-Cheek era when objective reality trumped subjective belief. Nowhere in the indictment is there any claim that the accountants or the taxpayers believed the transactions were improperly reported. Presumably, because in the view of this Justice Department, it does not matter. Perhaps the law should be changed to return us to an era where objective standards replace subjective beliefs as the basis for criminal tax charges. But making such change should not be attempted by indictment but rather should be accomplished through legislative change. And one would hope that the legislative change would accompany an objective standard for criminal tax fraud with a clear articulation of economic substance. There is a complaint that loans which were apparently needed (but just how or why is not stated) for one of the challenged transactions, may not have been real loans. This is the only substantive claim of outright fraud. But even here the charge is quite strange. It claims that the loans were shams as no money ever left the banks. However, in the same paragraph the indictment appears to acknowledge that some of the banks did fund the loans. Why these alleged loans were necessary or how they relate to the alleged tax fraud is left unexplained. The only other substantial substantive tax fraud claim is that the accountants and the lawyers gave opinions based on knowingly false representations. Of course, since the opinions were not necessary for the filing of the tax return as they addressed a standard having nothing to do with the tax return but only having to do with avoidance of the civil penalty, it is difficult to see the relevance of the opinions to the claims of tax fraud or conspiracy to commit tax fraud. There is much made in the superseding indictment, just as there was in the original indictment, that these opinions were the essence of tax fraud. Why an opinion, not given under penalties of perjury and not directly related to the propriety of filing a tax return but only related to defending against the potential application of penalties which the IRS might decide to impose, constitutes tax fraud is also left unanswered. As is the devilishly difficult question of how penalty avoidance can ever be tax fraud in light of the fact that penalties are not self executing. Unlike the earlier indictment, this indictment also has, with regard to three of the defendants, two counts of obstruction. These obstruction counts are even more peculiar than the tax fraud counts. Two of the defendants are charged with obstruction based solely on the claim they made to the IRS that KPMG has at this time virtually completed its compliance with the summonses. The other obstruction count claims that two of the defendants made a telephone call to the IRS falsely claiming that KPMG did not promote or market one of the shelters. These are extraordinary claims of obstruction. Claiming that one has substantially complied with a summons is an objective determination based on the state of mind of the person making the claim. It seems to be a flimsy basis upon which to make an obstruction claim. The other obstruction claim, based on a telephone call arguing that the accounting firm did not promote or market the shelter, is even more troubling. The obstruction claim is that this comment impeded the administration of the tax law. How a telephone call making a claim that the accounting firm did not market a product impedes anything to do with the tax law is not intuitively obvious. Quite to the contrary. One can be sympathetic to the Justice Departments frustration at the systems failure to deal adequately with these abusive shelters. We have no doubt they were abusive and believe that they quite properly should be subject to severe civil sanction. Our objection is to the use of the criminal law to obtain results otherwise apparently unobtainable. 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