WSJ: KPMG in Wonderland - A new, and very coercive, way to make tax law.

Wall Street Journal ^ | October 6, 2005 | Editorial

[OESY]

The trial of nine defendants in the KPMG tax shelter case is due to get under way soon in New York. All nine-- eight former KPMG partners and one outside lawyer-- have pleaded not guilty, despite an admission of wrongdoing by the company and a pledge by KPMG to cooperate with the government....

KPMG's cooperation with the feds was part of the price it paid to avoid a threatened indictment of the firm as a whole. As Arthur Andersen learned the hard way, that would have been a death sentence. KPMG has also agreed to cut its former partners off from financial support for their defense....

This might be understandable if it were a case of a few bad actors selling tax shelters that they knew to be illegal, as much of the press coverage would lead one to believe. But the facts tell a different story. All indications are that the Justice Department has conducted this investigation in an unprecedentedly aggressive fashion, both in how it held KPMG's feet to the fire and in the way it is now prosecuting the nine defendants.

According to the U.S. Attorney's indictment, the IRS began investigating the shelters in 2001, and "listed" at least two of them on July 26, 2001 (although KPMG stopped marketing or selling the shelters in 1999 and 2000). "Listing" is an IRS practice that dates back to the 1980s. It is a kind of early warning system for taxpayers, putting them on notice that the IRS considers the shelter suspect and that those who employ it may be subject to challenge in a Tax Court....

That gives this KPMG trial an Alice-in-Wonderland quality; the accused are on trial for promoting a fraudulent tax shelter that has never been proved to be fraudulent in the first place....