Tax Lawyer's Blog

KPMG Fraud Trial Juror?

The Associated Press has reported that,

Three days of closing arguments brought a jury closer Wednesday to deciding the fate of four men accused of using clever tax shelters marketed by accounting giant KPMG to help rich people evade more than a billion dollars in taxes.

One defense attorney, Jack S. Hoffinger, suggested to jurors that it was absurd to believe that the defendants had done what the government had charged them with doing:

“What do we have, a massive suicide pact?” he asked.

[The Defendants] would not have designed something criminal and then “put it out there so that the IRS will see it, the government will see it and we will end up in court charged with a crime.”

Another, Thomas Hagemann, argued that other expert tax advisors also thought the tax shelters promoted by the defendants were legal:

[T]he wealthy customers included people who ran public companies and had lawyers and tax advisers of their own who saw nothing wrong with the tax shelters.

“When you think about the late 1990s, why is it that all the accounting firms were into this?” he asked. “Because that is how capitalism works, unless something is illegal. If there is a product that can make money, people run to it.”

He added: “From 1996 to 2000, no one … believed they were taking criminal risk. They were wrong. We’re here. They got hindsighted to death.”

Author’s Note: By “hindsight” I assume Hageman doesn’t mean that, had the defendants known they’d be arrested and charged with a crime, they would not have concocted the schemes in the first place. That’s the argument all defendants make for why they broke the law. If it works here, I recommend it to Governor Blagojevich.

Assistant U.S. Attorney, Margaret Garnett, had an explanation:

[T]he defendants created tax shelters that were actually shams meant to appear to be legitimate investments.

“These defendants sold these so-called investments for years and years and not a single one of [their] clients ever made a dime of profit,” she said.

She said the only purpose of the fraudulent tax shelters marketed from 1997 until 2000 was to “generate artificial tax losses to evade millions and millions of taxes.”

Garnett said the defendants may have had a false sense of safety from the law.

“Their greed and ambition overcame their sense of right and wrong,” she said.

I don’t know all the intricacies of this complex case; however, I can’t imagine that the “everyone does it” defense will fly in this post-Watergate era.** These defendants are not being charged with throwing spit-balls or using corked bats, they are elite tax professionals charged with knowingly designing and selling tax shelters that they knew lacked economic substance.

And as for Mr. Hageman’s quip about the defendants being “hindsighted to death,” I would only add that the very point of tax planning is to correctly interpret the tax laws that exist at the time the tax plan is formulated. 

This is not a case of the government prosecuting a violation of an ex-post facto law. The laws the defendants are alleged to have broken were known to them at the time they formulated the tax shelters.

** I remember people defending Nixon’s actions with comments like this: “Everyone does it, he just got caught.”

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