This NY Times article has the skinny on the slobberknocking litigation that is taking place between harried but feisty KPMG and R. Cary and D. Calhoun McNair, sons of Houston Texans’ owner Bob McNair, over tax shelters that KPMG allegedly promoted to the McNairs back in 1999.
KPMG is walking a fine line in this lawsuit and numerous other civil lawsuits that have arisen over the firm’s former clients having problems with the IRS over claiming deductions for shelters that the IRS ultimately determined were abusive. Inasmuch as KPMG has already conceded that certain of its tax partners engaged in “unlawful conduct” in creating and selling the tax shelters, KPMG now has to juggle the dueling positions of being contrite while attempting to avoid a criminal indictment through negotiation of a deferred-prosecution agreement while fighting similar allegations in civil lawsuits with former clients to avoid potentially huge damage awards that could also sink the firm.

In the McNair lawsuit, KPMG is asserting that the McNairs knew fully well what they were getting into with regard to the tax shelter when they filed their returns. Consequently, KPMG is attempting to discover information about advice that the McNairs’ tax lawyers and investment advisers gave them in connection with filing the returns. In that regard, KPMG is also asserting that the lawyers and the advisers are responsible third parties for at least a portion of the damage award if the firm is found to be liable to the McNairs.
These lawsuits in which both sides are alleging that one is worse than the other in regard to the alleged wrongful conduct are among the dirtiest lawsuits imaginable. My sense is that KPMG would not normally ever allow this type of lawsuit to go to trial because of the risk that a jury would really lay the wood to KPMG for not only giving dubious tax advice on the shelters to the plaintiffs, but also for throwing dirt at the plaintiffs and their advisors. However, KPMG is in a highly difficult position these days, and the precedent of a large settlement in a case such as this may not be consistent with the firm’s plan for survival as a going concern. Therefore, KPMG may figure that it does not have much to lose by taking the case to trial because of the high risk that the firm will liquidate if it is hit with substantial damage awards in the large number of similar cases. If that is the case, the trial of this one could be very interesting — I’ve always advised clients to be very wary of litigating with a party that has little or nothing to lose.
Peter Henning also has interesting observations on the case.