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					                                      Duke Law Firm, P.C.-in the News
                                                           400 Vestavia Parkway, Suite 100
                                                        Birmingham, Alabama 35216-3750 USA
                                                             Volume 2, Issue 7: July 2005
                                  The following is a publication of Duke Law Firm, P.C. All Rights Reserved © 2005

                                          U.S. Tax Problems Caused by              withholding requirements, general-
             Conferences                  Per Se Corporations                      ly 30% on the income earned. And,
                                          Assume a U.S. person (or more            if that corporation is not formed in
J. Richard Duke will be speaking          than one person) forms a cor-            a treaty country, the tax treaty with
at the Legalease Conferences:             poration (that is referred to herein     the U.S. cannot be used to reduce
Practical Issues in Trust Adminis-        for discussion purposes as Per Se        the withholding rate.
tration, 19 September 2005, Wes-          Corporation) under a foreign cor-
tin Casuarina Hotel, Grand Cay-           porate law that is on the list of "per   At the end of the first calendar
man; and Practical Issues in Com-         se" corporations in the Treasury         year, let's assume that the invest-
pany Administration, 20 Septem-           Regulations. Treasury Regulation         ments in the U.S. resulted in inter-
ber 2005, Westin Casuarina Hotel,         § 301.7701-2(b)(8) lists eighty "per     est income. The European bank
Grand Cayman. Practical Issues in         se" foreign corporate statutes. Ex-      must file Form 1042 (Annual
Company Administration, 22 Sep-           amples include the Sociedad              Withholding Tax Return for U.S.
tember 2005, British Colonial Hil-        Anonima statute of Panama, Bra-          Source Income of Foreign Per-
ton, Nassau, Bahamas; and                 zil, Honduras and Costa Rica. Also       sons) and Form 1042-S (Foreign
Practical Issues in Trust Adminis-        included are the Barbados Limited        Person's U.S. Source Income Sub-
tration, 23 September 2005, British       Company, the Belize Public Limit-        ject to Withholding) with the
Colonial Hilton, Nassau, Bahamas:         ed Company and the Hong Kong             Internal Revenue Service, as well
                                          Public Limited Company. This             as withholding on the interest in-
                                          means that the foreign corporation       come (30%). If the Form 1042-S is
                                          is classified as a foreign corpora-      filed on paper instead of electro-
Offshore Alert Report                     tion for income tax purposes             nically, a Form 1042-T (Annual
OFFSHORE ALERT reported on Nigel          and it cannot file a Form 8832           Summary and Transmittal of Form
Scott Grant, who was announced            electing to be treated as a disre-       1042-S) must also be filed.
as "of counsel" to Duke Law Firm          garded entity (one shareholder) or
in the June 2004 issue of this            as a foreign partnership (two or         Now let's assume that the
newsletter. That relationship did         more shareholders). The Per Se           European bank is not a QI. Upon
not come to fruition and neither          Corporation retains the services of      investing through a financial insti-
Duke Law Firm nor any lawyer of           a bank in Europe. The European           tution or institutions in the U.S.,
Duke Law Firm has worked on a             bank is a qualified intermediary         that financial institution or insti-
client case with Nigel Scott Grant,       (QI), meaning that it has an agree-      tutions, as withholding agents,
directly or indirectly. Duke Law          ment with the Internal Revenue           must withhold the 30% on the
Firm has not referred a client to         Service that it will separate bene-      interest income and file the Forms
Mr. Grant, nor has Mr. Grant              ficial owners between U.S. per-          1042 and 1042-S with the Internal
referred a client to Duke Law Firm.       sons and non-U.S. persons.               Revenue Service.
                                          The Per Se Corporation is a sepa-
Mr. Duke advised David Marchant           rate entity and must provide a           The U.S. person or persons
of the above facts. Mr. Marchant is       Form W-8BEN (as the beneficial           who transfer assets, directly or
the owner of KYC News, Inc. that          owner) to the European bank. This        indirectly, to the Per Se Corpora-
publishes OFFSHORE ALERT and              shows the bank that the Per Se           tion are required to file a Form 926
other newsletters.                        Corporation is a corporation (se-        (a few exceptions apply, but most
http://www.offshorealert.com/             parate entity) and is the beneficial     often this form is due). Also, a
                                          owner.                                   Form 5471 (tax return for a foreign
No one is currently serving as "of                                                 corporation) is required to be filed.
counsel" to Duke Law Firm, P.C.           A part of the funds are invested in      Because the foreign corporation
                                          the U.S. A foreign corporation that      is owned by U.S. persons, it is a
                                          invests in the U.S. is subject to        controlled foreign corporation with
Page 2 of 7

subpart F income (passive invest-               Because the bank knows that the                    partnership interests steps-up to
ment income). Subpart F income                  foreign corporation (entity) is                    the fair market value (and an elec-
must be reported each year by the               disregarded for income tax pur-                    tion can be made to step-up the
U.S. shareholders whether that in-              poses and that the owner is a U.S.                 basis to the fair market value in the
come is distributed by the                      person for income tax purposes,                    assets attributable to the deceased
corporation. Because it is a con-               those investments are treated as if                partner of the foreign partnership).
trolled foreign corporation with                they were made directly by the
passive investment income, the                  U.S. shareholder. Thus, capital                    The partners file a Form 8865
following disadvantages result: (1)             gains rates are available, losses                  (Return of U.S. Persons with Re-
no capital gains rates are available            on investments may be taken, no                    spect to Certain Foreign Partner-
with respect to investments; (2)                withholdings on income apply and,                  ships).
losses on investments cannot be                 at the death of the shareholder, the
taken until the Per Se Corporation              basis in the assets of the corpora-                No Form 926 or Form 5471 is re-
is liquidated; (3) investments in the           tion steps-up to the fair market                   quired to be filed.
U.S. result in withholdings (as                 value.
stated above) and that income is                                                                   The shareholder or shareholders
also taxed to the U.S. share-                   No Form 926 or Form 5471 is re-                    are required to file a Form TD F
holders (a credit is available                  quired to be filed.                                90-22.1 and are also required to
against the withheld amount); and                                                                  complete Schedule B, Part III of
(4) at the death of the shareholder             The shareholder or shareholders                    the Form 1040.
or shareholders, the basis of the               are required to file a Form TD F
stock in the Per Se Corporation                 90-22.1 and are also required to                   Impact of Pasquantino Case
does not step-up to the fair market             complete Schedule B, Part III of                   See the May 2005 issue of the
value at the date of death.                     the Form 1040.                                     Duke Law Firm newsletter for the
                                                                                                   initial discussion of the Pasquan-
The shareholder or shareholders                 Now assume        that  two    U.S.                tino case. The following discussion
are required to file a TD F 90-22.1             shareholders (or more) form the                    is from Bruce Zagaris, International
(Report of Foreign Bank and                     foreign corporation referred to in                 Enforcement Law Reporter, Vol-
Financial Accounts) and are also                the previous paragraph. The cor-                   ume 21, Issue 7, July 2005:
required to complete Schedule B,                poration files a Form 8832 electing
Part III of the Form 1040.                      to be treated as a foreign part-                       On May 2, 2005, the Unit-
                                                nership for tax purposes. As a                         ed States Supreme Court
Let's see how the situation can be              result of this filing, the foreign                     has given another victory
changed. First, a corporation with              partnership is treated as a flow-                      to the Canadian govern-
one shareholder will be considered              through entity, meaning that all                       ment trying to enforce its
and the second will be a corpora-               income, gains and losses are re-                       excise taxes on spirits and
tion with two or more shareholders.             ported directly by the partners, not                   cigarettes when it denied a
                                                the partnership. The partnership,                      certiorari application trying
The U.S. person can form the                    for tax purposes (a corporation for                    to appeal criminal convic-
foreign corporation in a foreign                legal purposes), issues a Form W-                      tion for a wire fraud
jurisdiction that is not on the "per            8IMY (Certificate of Foreign Inter-                    scheme that deprived for-
se" list of corporations under the              mediary, Foreign Flow-Through                          eign governments of tax
Treasury Regulations. The foreign               Entity, or Certain U.S. Branches                       revenue. Fountain v. Unit-
corporation can then file a Form                for United States Tax Withholding),                    ed States, U.S. Supreme
8832 electing to be treated as a                along with a W-9 for each of the                       Court, No. 04-294, cert.
disregarded entity for income tax               partners (shareholders for legal                       denied, May 2, 2005. The
purposes. As a result, the sole                 purposes) to the bank. The bank                        same day the U.S. Su-
shareholder is treated as the                   knows that the partnership is a                        preme Court vacated dis-
beneficial owner and the payee of               flow-through entity and that all                       missal of a RICO action
income with respect to that foreign             income, gains and losses are tax-                      brought by the European
corporation.                                    ed to the U.S. partners for tax                        Community and various
                                                purposes. Thus, capital gains rates                    EC cases against RJR Na-
The U.S. shareholder of the                     are available, losses on invest-                       bisco for cigarette smug-
foreign corporation issues a Form               ments may be taken, no with-                           gling to evade excise tax-
W-9, gives it to the foreign bank,              holdings on income in the U.S.                         es.
and the foreign bank invests a                  applies and, at the death of a
portion of the assets in the U.S.               partner, the basis of the foreign

           Information provided in this newsletter is for information purposes only and may not be relied upon as legal advice.
                                                               Copyright 2005
Page 3 of 7

   The appellate court in the                       statute,   notwithstanding                        clear evidence of a con-
   U.S. Court of Appeals for                        the revenue rule, which                           gressional intent to abro-
   the 2d Circuit held that                         generally bars courts from                        gate the revenue rule as it
   taxes owed to any govern-                        enforcing the tax laws of                         applies to claims brought
   ment–even if not yet                             foreign sovereigns.                               under RICO. For additional
   collected–are “property” of                                                                        background     see    Raul
   that government under the                        The plaintiffs in RJR                             Cabrera, Court’s Pasquan-
   wire fraud statute. 18                           Nabisco alleged that the                          tino Ruling Spawns, Re-
   U.S.C. § 1343. The ap-                           defendants were actively                          view of Revenue Rule in
   peals court denied relief to                     involved in smuggling con-                        Racketeering      Context,
   a petitioner who used the                        traband cigarettes into the                       DAILY REP. FOR EXEC.,
   habeas corpus statute to                         EC, the member states,                            May 3, 2005, at G-7.
   appeal a conviction of con-                      and various locations a-
   spiracy to launder the pro-                      round the world, for many                         Analysis
   ceeds of a wire fraud                            years. The plaintiffs argu-                       The implications from Pas-
   scheme, based on curren-                         ed the defendants’ smug-                          quantino are ominous and
   cy activities trying to evade                    gling activities included                         are sending shock waves
   high Canadian excise tax-                        conduct and effects in the                        through the U.S. business
   es on tobacco products.                          Eastern District of New                           community. In at least ap-
                                                    York. The complaint alleg-                        proximately one-third of
   On May 2, 2005, the U.S.                         ed the defendants made                            the world, including most
   Supreme Court also vacat-                        an agreement with distri-                         of Latin America, the for-
   ed an appeals court judg-                        butors, customers, agents,                        mer Soviet Union, Africa
   ment that held that the                          consultants, and other                            and the Middle East, main-
   common law “revenue                              coconspirators to partici-                        stream businesses com-
   rule” bars courts from ad-                       pate in a scheme to smug-                         monly arrange their affairs
   judicating foreign sover-                        gle contraband cigarettes                         so as to evade tax, often
   eigns’ claims, brought un-                       and that they conspired                           through the use of offshore
   der the federal Racketeer                        with others to promote and                        structures to receive and
   Influenced Corrupt Organi-                       conceal their smuggling                           make payments. Osten-
   zations Act (RICO) statute,                      activities by means, in-                          sibly the arrangements on
   for damages resulting from                       cluding fixing the price of                       their face are to avoid
   defendant tobacco com-                           contraband cigarettes; and                        currency restrictions that in
   panies’ cigarette smug-                          that, in the process of                           some countries itself may
   gling scheme that al-                            smuggling cigarettes, the                         be a tax crime. In other
   legedly caused loss of tax                       defendants engaged in the                         countries avoiding curren-
   revenues to the plaintiffs                       business and services of                          cy restrictions may not rise
   European Community (EC                           narcotics traffickers and                         to the level of a crime, but
   and various EC countries.                        money launderers, and                             only an administrative pe-
   European Community v.                            hence facilitated or en-                          nal offense. Many coun-
   RJR Nabisco Inc., U.S.                           gaged in laundering the                           tries, such as Brazil and
   Supreme Court, No. 03-                           proceeds of crime. The                            Russia, are rapidly chang-
   1427, judgment vacated,                          plaintiffs requested mone-                        ing their tax laws, closing
   May 2, 2005.                                     tary, declarative, and in-                        loop-holes, such as the a-
                                                    junctive relief.                                  bility of citizens and resi-
   The order vacating the                                                                             dents to maintain for pur-
   judgment in the RJR Na-                          On February 19, 2002, the                         poses of receiving income
   bisco case and the denial                        district court in the Eastern                     offshore accounts (e.g.,
   of certiorari in Fountain                        New York dismissed the                            Brazil) (Raymond Colitt,
   followed the Supreme                             action based on the re-                           Bank Chief in Tax Fraud
   Court decision the prior                         venue rule, which the                             Probe, FIN. TIMES, May
   week in Pasquantino v                            RICO action triggered. On                         13, 2005, at 2, col. 1
   United States, in which the                      January 14, 2004, the                             (discussing the authori-
   court held that a scheme                         Second Circuit affirmed,                          zation of criminal investi-
   to defraud a foreign gov-                        holding that the USA Pa-                          gation against Henrique
   ernment of tax revenue                           triot Act and its legislative                     Meirelles, the central bank
   violates the wire fraud                          history did not provide                           chief, over alleged tax

          Information provided in this newsletter is for information purposes only and may not be relied upon as legal advice.
                                                              Copyright 2005
Page 4 of 7

   fraud and misdemeanors                           in accordance with cus-                           According to the final
   against the financial sys-                       tommary international law.                        Securities and Exchange
   tem because his personal                                                                           Commission (SEC) rule
   wealth was incompatible                          A major problem in the                            implementing this provi-
   with the tax returns he has                      U.S. for businesses that                          sion, the rule does not
   filed since 1996. Brazilians                     are issuers or public com-                        explicitly require the com-
   commonly opened off-                             panies is that they are                           pany to disclose the rea-
   shore bank accounts into                         subject not only to the wire                      sons for any change that
   which they received for-                         and mail fraud statutes                           accrued during the fiscal
   eign source income. Mr.                          giving rise to the Pas-                           quarter, or to otherwise
   Meirelles worked in the                          quantino type cases, but                          elaborate      about     the
   U.S. for international or-                       simultaneously to reporting                       change. However, the
   ganizations while receiving                      requirements in the Sar-                          company will have to
   some of the income, which                        banes-Oxley Act (SOX).                            determine, on a fact and
   is the source of the tax                         SOX requires U.S. busi-                           circumstances basis, whe-
   controversy)) and pena-                          nesses to follow new rules                        ther the reasons for
   lizing the use of offshore                       and procedures in con-                            change, or the information
   mechanisms for the same.                         nection with the financial                        about the circumstances
   For instance, Russian re-                        reporting and auditing pro-                       surrounding the change,
   venue officials are very                         cess. Among those re-                             constitute material infor-
   aggressively auditing and                        quirements (e.g., Sec.                            mation necessary to make
   bringing criminal actions                        302) are for the CEO and                          the disclosure about the
   against a variety of busi-                       CFO of each issuer to                             change not misleading.
   nesses.                                          prepare a statement to
                                                    accompany the quarterly                           If a U.S. company discov-
   Certain economic sectors                         financial reports which cer-                      ers that the way it is and
   may be more vulnerable                           tify that they have disclos-                      has been doing business
   than others. For instance,                       ed to their audits and the                        is a criminal violation of a
   due to the dynamic up-                           audit committee all signi-                        foreign jurisdiction and
   surge in the energy sector,                      ficant deficiencies and ma-                       thereby has a U.S. wire
   many foreign governments                         terial weaknesses in their                        and mail fraud violation, it
   are aggressively trying to                       internal control system,                          has the dilemma of con-
   extract more revenue from                        and that they have dis-                           tinuing to do business,
   the sector by aggressively                       closed material changes in                        thereby increasing its risks
   auditing and bringing cri-                       those control systems sub-                        of U.S. and foreign cri-
   minal actions against for-                       sequent to the last evalua-                       minal     proceedings     or
   eign operators, issuing ad-                      tion.                                             changing the ways it does
   ministrative rulings, and                                                                          business, thereby under-
   enacting legislation. Many                       Specifically, Sec. 302(a)(6)                      mining its market. As-
   of these cases lead to                           of SOX requires the                               suming at some point it
   lengthy disputes, the out-                       CEO/CFO to certify that                           decides to change the
   come of which is costly                          the issuer has disclosed in                       ways it does business, the
   and uncertain. Some for-                         the quarterly (or annual)                         change would likely pre-
   eign companies are in-                           report any change in in-                          cipitate an internal in-
   voking investment agree-                         ternal control over financial                     vestigation and SOX im-
   ments in order to bring                          reporting during the last                         plications. The stakes,
   cases in international dis-                      quarter that has “materially                      risks, and issues for multi-
   pute fora to resolve the                         affected, or is reasonably                        national corporations with
   disputes. These agree-                           likely to materially affect”                      widespread international
   ments have the advantage                         the issuer’s internal con-                        operations are heightened.
   of providing for a wide                          trols. This could include
   range of obligations by the                      any corrective actions with                       Clearly Pasquantino and
   host country to accord the                       regard to significant defi-                       its progeny pose enor-
   investment national treat-                       ciencies     and    material                      mous new legal, business,
   ment, most-favored-nation                        weaknesses.                                       and ethical traps for the
   treatment, and treatment                                                                           wary in the U.S. because
                                                                                                      of the enormous gap

          Information provided in this newsletter is for information purposes only and may not be relied upon as legal advice.
                                                              Copyright 2005
Page 5 of 7

    between business prac-                        support to clear 60-vote procedural                represented one or more other
    tices and the law, both in                    hurdles in the Senate.                             parties with whom the client did
    the U.S. and throughout                                                                          business. Some experts say a loss
    the world. U.S. businesses                    According to Kyl, they have agreed                 could force the law firm into
    are in a conundrum and a                      that any estate tax bill will retain               bankruptcy.
    very uncertain situation                      current law's "step-up in basis,"
    that may undermine their                      which allows the value of inherited
    competitiveness until they                    property to be "stepped up" to its                 Aggressive Lawyering Goes
    are able to obtain more                       fair market value at the time of                   Over the Line
    certainty in resolving the                    inheritance when calculating capi-                 The Connecticut Law Tribune
    uncertainties brought by                      tal gains. Kyl and Baucus have                     Law.com
    the Pasquantino decision                      also agreed to keep intact the                     In a landmark dispute on the limits
    and its implications in the                   extended periods estates may use                   of aggressive lawyering, a jury has
    context of other U.S., for-                   to pay off their tax bills, Kyl said.              delivered a resounding verdict
    eign and international law.                   Farm estates, for instance, are                    against two Connecticut attorneys
                                                  allowed 10 years to settle their                   for fraudulent conduct in violation
U.S. District Judge Rules IRS                     estate tax liability under current                 of civil portions of the Racketeer
"Reckless"                                        law. But the heart of the estate tax               Influenced and Corrupt Organi-
Charlotte Amalie, U.S. Virgin                     relief package will include a cut in               zations Act. Lawyers involved in
Islands: A federal judge threw out                estate tax rates and "a good-sized                 the case say, to their knowledge,
evidence against 4 men charged                    exemption that would be indexed                    the verdict is the first in the nation
with laundering $60 million+                      for inflation," Kyl said.                          in which the private cause of action
through their chain of USVI                                                                          under the federal RICO statute has
grocery stores, ruling that FBI                   Document: (Doc 2005-14884)                         been used successfully against
agents acted in "reckless disregard               Electronic Citation: See 2005 TNT 133-1            lawyers for actions related to
for the truth" using fraudulent                                                                      representation of a client.
search    warrants.     Defendants                U.K. Tax Collectors Mimic U.S.
charged anti-Arab, anti-muslim                    IRS
                                                  The Sovereign Society Offshore A-                  Firms Compete For Class
prejudiced was involved.                                                                             Settlement Action in KPMG
                                                  Letter: Monday, June 20, 2005-
                                                  Vol. 7 No. 123                                     Investor Suits
*U.S. judge throws out IRS money                                                                     Published by Tax AnalystsTM
laundering evidence:                              LONDON: Taking a leaf out of the
                                                  IRS play book, British Revenue is                  Under     threat      of   indictment,
[To view this link, please copy and                                                                  KPMG's recent public admission of
paste in your Web server]                         tracking down U.K. residents
                                                  offshore credit and debit card use                 wrongdoing is fresh meat for the
                                                  for possible tax evasion. New EU                   circling plaintiffs' lawyers now vy-
laundering,0,1151195.story                        tax rules mean that accounts held                  ing to be appointed lead counsel
                                                  offshore, in places such as Luxem-                 for a potential class of investors
2473/776635/0/                                                                                       who are suing the beleaguered
                                                  bourg, Guernsey and Jersey, can
                                                  no longer be kept from the scrutiny                accounting firm, Deutsche Bank,
Baucus, Kyl Agree On Estate                                                                          and Sidley Austin Brown & Wood,
Tax 'Parameters'                                  of the taxman if you are a EU
                                                  resident.                                          among others.
Published by Tax AnalystsTM
The two senators charged with                                                                        With a putative class-action suit
finding a permanent, bipartisan                   Gunster Yoakley Faces Two
                                                  Malpractice Trials                                 pending against it in a federal dis-
compromise on the estate tax have                                                                    trict court in Arkansas brought by a
reached an agreement on the                       Daily Business Review
                                                  Gunster Yoakley & Stewart faces                    local firm and a New York firm,
framework of a deal, according to                                                                    KPMG has been negotiating with
Republican pointman Sen. Jon Kyl,                 two legal malpractice trials in
                                                  which plaintiffs are accusing the                  another firm, New York-based
R-Ariz.                                                                                              Milberg Weiss Bershad & Schul-
                                                  Florida-based law firm and its
                                                  attorneys of conflict of interest and              man, for a "prepackaged" settle-
Kyl     and     Senate     Finance                                                                   ment deal, according to a June 22
Committee ranking minority mem-                   are seeking tens of millions of
                                                  dollars in damages. Both suits—                    motion filed by the New York
ber Max Baucus, D-Mont., have                                                                        plaintiffs' firm of Bernstein Litowitz
been trying for over a month to find              one involving heirs to the Gannett
                                                  newspaper fortune—claim that                       Berger & Grossmann. Conse-
an estate tax relief compromise                                                                      quently, counsel of the proposed
that will muster enough bipartisan                Gunster lawyers failed to properly
                                                  notify a client that the firm                      class in Arkansas is seeking ap-
                                                                                                     pointment as interim class counsel
             Information provided in this newsletter is for information purposes only and may not be relied upon as legal advice.
                                                                 Copyright 2005
Page 6 of 7

to enjoin KPMG from entering into                     June 13 charging their respective                  as they occur, and not all reporters
a potentially collusive agreement                     financial and tax advisers with                    are able to, or have the time to, or
with Milberg Weiss and to enjoin                      breach of contract, fraud, negligent               are inclined to put all the pieces
the latter law firm from filing a                     representation, and civil conspir-                 together to show you the whole
class action.                                         acy for not warning them about the                 picture of what happened," she
                                                      estate planning maneuvers. The                     said.
Document: (Doc 2005-13720)                            shelter clients claim they were told
Electronic Citation: See 2005 TNT 121-2
                                                      the plan "took advantage of a                      O'Connor referred to a decision in
                                                      'legal' loophole in the tax code to                the case of the law firm BDO
Tort Lobby Sharpens Its Aim                           reduce tax liability."                             Seidman case last year as an
Legal Times                                                                                              example. In June 2004, a district
Law.com                                               The plaintiffs maintain they were                  judge denied the government's
An enduring image in the legal                        also kept in the dark about the                    motion to compel disclosure of 110
reform community is trial lawyers                     abusive tax shelter amnesty pro-                   documents for which BDO Seid-
as a vast insect horde, ceaselessly                   gram offered by the IRS in 2002.                   man had asserted the attorney-
picking their targets, filing their                                                                      client privilege and the work pro-
lawsuits, making their billions and                   The three investors paid Bank One                  duct doctrine in a summons en-
moving on to the next tort. And that                  and its associates roughly $5.4                    forcement action against the firm.
image gives tort reformers little                     million to purchase tax avoidance
chance to rest, even after back-to-                   packages they say their advisers                   The theme in media coverage of
back victories on class action and                    knew violated the anti-COBRA                       the decision was "government
bankruptcy bills. "Trial lawyers are                  rules outlined in Notice 2000-44.                  loses a big one," according to
a business," says Lisa Rickard,                       Brody and the Wilsons have sub-                    O'Connor. She noted, however,
president of the U.S. Chamber of                      sequently paid another $5.3 million                that BDO Seidman had already
Commerce's Institute for Legal                        in penalties and interest to the IRS               been forced to hand over thou-
Reform. "And people need to un-                       since coming under audit.                          sands of other documents in the
derstand they're a business."                                                                            case.
                                                      Government Doing Just Fine in
Investors Criticize Tax, Financial                    Shelter Cases, O'connor Says                       "What that story didn't tell you is
Network for Pushing Cobra-Like                        Published by Tax AnalystsTM                        that this is ongoing litigation,"
Plan                                                  Eileen J. O'Connor, assistant at-                  O'Connor said.
Published by Tax AnalystsTM                           torney general for the Tax Division
Three people who purchased a for-                     at the Justice Department, said on                 O'Connor declined to comment on
eign currency option plan dubbed                      June 16 that, despite some losses                  the Justice Department's investi-
HOMER—a grantor trust scheme                          in the courts, the government is                   gation of past tax services offered
designed to generate fake losses                      doing "very well" in obtaining in-                 by KPMG LLP, citing government
to help offset legitimate income                      formation from alleged promoters                   policy in ongoing investigations.
gains—are suing Bank One and its                      of abusive tax shelters.                           KPMG announced on June 16 that
financial and legal partners for                                                                         it is in "discussions" with Justice
peddling the tax scheme.                              Speaking at a meeting of the                       regarding the government's invest-
                                                      American Institute of Certified Pub-               igation into services KPMG offered
Bank One personnel purportedly                        lic Accountants in San Francisco,                  from 1996 through 2002.
developed the Hedge Option                            O'Connor took an implicit shot at
                                                      the tax press, cautioning against                  Document: (Doc 2005-13158)
Monetization of Economic Remain-
                                                                                                         Electronic Citation: See 2005 TNT 116-3
der (HOMER) strategy along with                       putting too much stock in media
fellow defendants Deutsche Bank                       reports of government losses in
and White & Case LLP. American                        the courts related to the current
Express and Arthur Andersen LLP                       war on tax shelters.                               THIS NEWSLETTER WAS
are also named in the suit for                                                                           NOT INTENDED OR WRITTEN
signing off on the HOMER plan                         O'Connor said that "justice some-                  BY DUKE LAW FIRM TO BE
while preparing the plaintiffs' 2001                  times takes a very long time to run                USED, AND CANNOT BE
tax returns.                                          its course," and one decision does                 USED, BY A READER FOR
                                                      not always paint an accurate pic-                  THE PURPOSE OF AVOIDING
Shelter buyers Donald R. Wilson                       ture of what is going in a case.                   PENALTIES. IRS CIRCULAR
Jr.; his wife, Laurie Wilson; and                     "You cannot always read a tax
                                                                                                         230, SECTION 10.35(b)(4)(ii).
business associate Kenneth S.                         story and have the whole story.
Brody filed suit in federal court on                  The pieces will be reported to you

                 Information provided in this newsletter is for information purposes only and may not be relied upon as legal advice.
                                                                     Copyright 2005
Page 7 of 7

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                                                               Duke Law Firm, P.C.
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              Information provided in this newsletter is for information purposes only and may not be relied upon as legal advice.
                                                                  Copyright 2005

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