Bomb Shelters or Tax Shelters?

ACCOUNTANTS ROCK THE SEC: GIMME TAX SHELTER

By Arianna Huffington

Talk about perfect timing. To give the millions of Americans who
are taking up the dreaded yearly task of preparing their taxes
just a little bit more aggravation, comes the story of massive
tax avoidance by Sprint CEO William Esrey and his right-hand man
Ron LeMay. These two paid no taxes on a total of $288 million in
stock-option profits thanks to some highly imaginative tax
shelters dreamed up by the accounting alchemists at Ernst &
Young.

Two hundred and eighty-eight million smackeroos. And you were
worried about whether you could deduct that $42 business lunch
you had with a friend? You're obviously not aiming high enough.

And it's not just Esrey and LeMay who aren't paying their fair
share. According to the IRS, hundreds of other businesses and
executives -- including Tyco's Dennis Kozlowski and Global
Crossing's Gary Winnick -- have used questionable shelters to
escape paying billions of dollars in taxes.

So how, exactly, does one make $288 million in taxable income
disappear?

It's a magic trick that requires a combination of accounting
sleight-of-hand and legal mumbo-jumbo, as well as the willing
compliance of a wide-array of accomplices -- including
see-no-evil corporate boards, toothless government regulators,
and that crucial building block of any decent tax shelter,
bought-and-paid-for politicians.

Let's start with the accounting industry, which rakes in hundreds
of millions of dollars a year selling tax shelters. Looking for
ways to cash in on the go-go 90s -- and pouncing on an insanely
misguided 1991 rule change that allowed accountants to pocket a
percentage of the tax money they save a client instead of merely
charging an hourly fee -- accounting firms began aggressively
devising and marketing complex tax avoidance schemes. Why go
after boring old bookkeeping work when there was gold in them
thar shelters?

The rule change created an irresistible new incentive, and the
big firms responded by creating high-pressure in-house sales
teams -- units brimming with such arrogance and confidence in
their impunity that they gave themselves rapacious-sounding
nicknames. At Deloitte & Touche, the "Predator" group stalked
potential clients; at BDO Seidman, the "wolf pack" was on the
prowl. The hunt proved extremely lucrative. Seidman's wolves
dragged in over $100 million in tax shelter commissions in 2000.

The tax ploys these shelter savants concocted were so convoluted
that even the finance-savvy executives they were hawking them to
often had a hard time understanding how they worked. But that was
okay, because they certainly understood the end result: a
seriously lowered tax bill.

Take the smoke-and-mirrors trickery Ernst & Young used to
obliterate the millions in taxes that Esrey and LeMay owed on the
$288 million they'd made off Sprint stock options. First the
accountants waved their hands over the execs' money and turned it
from income into capital gains. Presto! Then they wiggled their
slide rules and raised the cost of Sprint stock. Change-o! Next
thing ya know -- Poof! -- Esrey and LeMay didn't owe the IRS a
cent.

But then the IRS woke up and began cracking down on shelters that
have no purpose other than cheating the public out of money it
is due. Now the execs are facing a mountain of back taxes.
Gumming up the works even more is the fact that, in addition to
scheming up evasive maneuvers for Sprint's bigwigs, Ernst &
Young is also the longtime auditor of Sprint.

But don't feel too bad for the embattled execs. It's not like
anybody was really pulling the wool over their eyes; indeed,
these tax shelters are usually presented to clients with a level
of skullduggery usually reserved for characters in a John le
Carre novel or men cheating on their wives. In many cases,
clients have to sign a nondisclosure agreement before the
accountants will even pitch them the scheme. And they're told in
advance that the deal will be kept secret from the IRS -- both of
which should be pretty good clues that the arrangement might not
exactly be on the up-and-up.

But as I said before, greedy execs and predatory accountants are
not the only ones to blame. Not when law firms are reaping
millions in easy money handing out so-called "opinion letters,"
which theoretically provide assurance to clients that tax
shelters are legitimate but, in reality, are little more than the
legal equivalent of crossed fingers. The letters, which usually
go for between $50,000 to $75,000, have become a tax cheat's
get-out-of-jail-free card because the IRS will typically waive
additional penalties for those defendants who have one.

So, in effect, the letters take the risk out of cheating: if
big-money tax dodgers get caught (and given the IRS's limited
enforcement budget, the odds favor the cheaters by a huge margin)
they only have to pay the money they originally owed, plus
interest. Why not give it a shot? All you have to lose is your
integrity. Adding to the sleaze, law firms providing opinion
letters are usually in bed with the tax shelter sellers -- Ernst
& Young even handed out a sheet listing how much the coveted
letters would set a client back. How convenient: one-stop tax
evasion.

And, of course, we can't forget the spineless politicians and
government toadies who pass the laws -- and leave the loopholes
-- that make all this financial flim-flam possible in the first
place. Even with all the corporate horrors and accounting
industry rip-offs we've seen over the last year, our leaders just
can't break free from the stranglehold that special interest
campaign contributions and lobbyists have on them.

Just two weeks ago, as the Securities and Exchange Commission was
putting the finishing touches on new rules designed to put an
end to conflicts of interests at accounting firms, the idea of
banning these firms from double-dipping as tax advisors was
considered. And then, after an all-out lobbying effort by the
accounting industry, rejected. Instead, the commission crafted a
loophole allowing accounting firms to continue to sell tax advice
to clients whose books they are "independently" auditing. The
SEC's dictionary clearly has a very different definition of
"independent" than mine. Or Webster's. But then he was probably
dumb enough to actually pay his taxes.

Conflicts of interest must end. Rich corporate executives should
not be allowed to avoid paying their fair share. Well, duh! In
saying these things, I feel like all I'm doing is stating the
blatantly obvious.

So why isn't the blatantly obvious obvious to the people in
Washington?