Stein - The Court got it right! The Government and the Wall Street Journal Editorial just don't get it.

Judge Kaplan dismissed the indictment against 13 of the former KPMG employees who were charged in the largest criminal tax case in the history of the United States. The Court correctly found that the government violated their constitutional rights when it coerced KPMG to stop paying their legal fees. See United States of America v. Stein, -- F.Supp. 2d – (SD. N.Y. 2007).

The Government filed its appeal claiming there was no constitutional violation. This past Thursday, the editorial page the Wall Street Journal blasted the government for attempting to proceed with the case. The Government and the Wall Street Journal just don’t get it.
As stated in the blog Posted on February 11, 2007 “KPMG and the Government's "Prosecution of KPMG" - Can we learn any lessons from this investigation with the approach of FIN 48?”, the Government violated the defendants’ constitutional rights. The troubling part was the Government did not need to pursue said actions in order to prevail in this case. The cold hard facts were that the transactions being investigated by the government were aggressive tax shelters being promoted by KPMG. Moreover, KPMG knew that these transactions had no economic substance and violated title 26.

Simply stated, I challenge anyone to tell me that a taxpayer can have million + dollar transaction magically disappear by a transaction that is marketed to high wealth individuals and corporations and with an argument “that this is what the code permits.”

Bottom line not even KPMG believed in these transactions – look at the e-mails and the records submitted by KPMG in response to the summons action initiated by the Government and finally look at the guilty plea that is not actually a guilty plea which the Government claims is a victory. Translation of the plea: Not much of a victory. Reason the government realized that it could not afford to lose another major accounting firm and thus the Government, with the assistance of the law firm representing KPMG, focused on the individual partners and managers of KPMG who were involved in the transactions.

So the Government will seek its appeal and one can hope that the Second circuit will follow the lead of Judge Kaplan. Based on its prior review of the case one can conclude that the Second Circuit will allow the dismissal to stand as a lesson to an overzealous prosecution and a reminder the government wears the white hats - if the hat gets the slightest tinge of gray in it the government, as the representative of the people, needs to be reminded that it cannot cross the line.

At the same time that the government failed to understand the significance of its actions in Stein, the editorial page in this past Thursday’s Wall Street Journal failed to understand the essential fact in the Stein case. In the editorial it alleged that the transactions at issue were legal. Oh really?

Justice Holmes once observed “Taxes are what we pay for civilized society.” Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87 (1927). The internal revenue code and judicial doctrines are the mechanisms that ensure that proper planning is undertaken to ensure that the least amount of tax is properly reported and paid.

As a mentor of mine has said tax law allows for “deferral but not evasion” of taxes. The code and the judicial doctrines allow for proper planning mechanisms to be employed. See United Parcel Service of America v. Commissioner, 254 F. 3d 1014 (11th Cir. 2001). There is no need for planners to ignore their fiduciary obligations to their clients and expose the clients to planning solutions that are nothing more than glorified mechanisms for tax evasion. The accountants and lawyers were in a position of trust and they marketed the tax shelters which we all became aware of.

Those planners were engaged in the practice of tax law and they knowingly ignored the law. When someone willfully violates the law, said individual is normally subject to criminal prosecution. So am I missing something?

What the Wall Street Journal fails or does not want to recognize is that the practice of tax is the practice of law. Sadly, I guess the Government agrees but the last time I looked the tax code is in Title 26 and if one violates Title 26 U.S.C. Section 7201 et. al. then one will face a criminal trial. If the individual is found guilty then that individual will face a criminal sentence under the guidelines. Simply stated, a criminal violation of the code is not just reserved for Al Capone. Sadly it was alleged and KPMG “kind a of agreed” that a violation of the code occurred here. Unfortunately, the Government crossed the line and just as unfortunate, if we are to believe the editorial section of the Wall Street Journal, corporate America did not learn the lesson because it just didn’t get it.