One big problem with the federal government’s criminal case against the defendants in the KPMG tax shelter case is that neither the defendants nor any of their clients engaged in any affirmative act of evasion, such as keeping false accounting books or literally hiding income so that the IRS could not find it. Rather, each taxpayer claimed losses on the taxpayer’s return in accordance with a literal application of the tax law and then, as often happens, the IRS challenged the claims. KPMG’s clients needed KPMG’s opinion regarding the validity of the tax shelters to protect themselves against civil penalties the IRS might try to impose as a result of a challenge to the tax returns, but they did not need the KPMG opinions to file the tax returns claiming the losses. Thus, the KPMG opinion had not bearing on the propriety of filing a tax return and is irrelevant to the crime of tax evasion.
To get around that problem, federal prosecutors came up with the second crime of so-called tax perjury, which involves a demonstrable lie asserted in a tax return or some other document that is submitted to the IRS under penalty of perjury. However, the tax perjury case against the accountants is flimsy at best. During the audit of the KPMG clients’ returns, the KPMG clients contended that they had a business purpose sufficient to meet the IRS standard for avoiding civil penalties and then produced KPMG opinion, which is not submitted under penalty of perjury. Thus, best case for the prosecution is that the taxpayers and KPMG may have been disingenous, but that hardly renders perjurious the submission of a tax return that was factually correct.
Now, it appears that at least some of those tax returns were not even misleading. According to this NY Times article, US District Judge T. John Ward of the Eastern District of Texas ruled earlier this week in a civil case that one of the KPMG tax shelters that is at the center of the KPMG tax shelter case is essentially legitimate.
What is the Justice Department’s justification for criminalizing such conduct? According to the article, “prosecutors in the KPMG case have indicated that they will argue that the shelter itself was technically valid, but that the way the defendants carried it out was not.”
As this Wall Street Journal ($) editorial opines today, there is a serious shortage of adult supervision in the US Department of Justice these days.