Congress and KPMG

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Wall Street Journal:

The IRS’s standard in evaluating tax shelters is whether the transaction serves a “legitimate economic purpose,” or is crafted entirely to avoid taxes. Senators Carl Levin (D., Mich.) and Norm Coleman (R., Minn.) have proposed legislation that would enshrine that doctrine in law.
Speaking on the Senate floor last month, Mr. Levin described the distinction: “Abusive tax shelters are very different from legitimate tax shelters, such as deducting the interest paid on home mortgage or Congressionally approved tax deductions for building affordable housing. Abusive tax shelters are complicated transactions promoted to provide large tax benefits unintended by the tax code” (our emphasis). In other words, it’s OK to avoid taxes in any of the myriad ways Congress approves of. It’s abusive if Congress didn’t intend it — assuming anyone can ever figure out what Congress really intends.
Take the scheme known as SC2, one of those KPMG has come under fire for marketing. As reported in the Los Angeles Times, SC2 involved donating nonvoting shares in a Subchapter S corporation to a nonprofit entity; KPMG’s nonprofit of choice was the Los Angeles Fire and Police Pension System. The pension system would accept the shares, making them 90% owners of an S Corporation that would then retain the Corporation’s profits for several years. At that point, the pension fund would sell the shares back to the original owners. The pension plan pockets the proceeds while the S Corporation owners have converted the firm’s profits from regular income into long-term capital gains, taxed at a lower rate.
Does SC2 serve an “economic interest”? Well, the participant in the scheme does pay the pension system for the shares when he buys them back, benefiting the firemen and policemen’s pension fund. The fund adds money to its coffers, and the taxpayer lowers his tax bill. Whether that’s abuse is for a judge or jury to decide, but Mr. Levin’s test — that Congress didn’t intend S corporations to be used that way — doesn’t seem adequate here.

(more…)

“Trusted Computing” – Coming Soon to your PC

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Bruce Schneier on “Trusted” Computing:

The Trusted Computing Group (TCG) is an industry consortium that is trying to build more secure computers. They have a lot of members, although the board of directors consists of Microsoft, Sony, AMD, Intel, IBM, SUN, HP, and two smaller companies who are voted on in a rotating basis.

The basic idea is that you build a computer from the ground up securely, with a core hardware “root of trust” called a Trusted Platform Module (TPM). Applications can run securely on the computer, can communicate with other applications and their owners securely, and can be sure that no untrusted applications have access to their data or code.

This sounds great, but it’s a double-edged sword. The same system that prevents worms and viruses from running on your computer might also stop you from using any legitimate software that your hardware or operating system vendor simply doesn’t like. The same system that protects spyware from accessing your data files might also stop you from copying audio and video files. The same system that ensures that all the patches you download are legitimate might also prevent you from, well, doing pretty much anything.

Memories: 1967 Ford Country Squire

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Patrick Paternie on US culture and station wagons:

The term station wagon has evolved from a G-rated to an X-rated word and back again among U.S. automotive marketers. But love it or call it a five-door sedan, the station wagon is the iconic American automobile.
Station wagons flourished along with the growth of two other definitive aspects of the modern American lifestyle, the suburbs and the interstate. The epitome of nuclear family-era transportation, a roomy, luxurious station wagon and a AAA TripTik was a recipe for family bonding and adventure before National Lampoon’s Vacation and the Griswolds turned it into a rolling-disaster movie script.
By the end of the 1950s station wagons accounted for nearly one of five new car sales. It was the aspirational vehicle of the period, as evidenced by the Country Squire’s status at the top of Ford’s lineup.

More on the Tax System Mess: KPMG Indictments

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Quite a bit of news Monday on the ongoing US Government Tax Shelter Investigations:

  • TaxProf links to statements, resolutions and indictments.
  • Jonathan D. Glater discusses the Southern District of New York’s Indictments and notes that:

    As part of its agreement with the government, KPMG issued a strongly worded acknowledgment of wrongdoing, which can be used by prosecutors in their criminal case against the individual partners, as well as against the firm in the event it violates the terms of the deferred- prosecution agreement. Lawyers for the former partners criticized the firm’s statement as meaningless.
    “The government held a gun to KPMG’s head and said, ‘Say what we want or we will put you out of business,” said Robert H. Hotz Jr., a lawyer at Akin Gump Strauss Hauer & Feld who is representing Mr. Lanning. “KPMG’s statements in court were the product of extreme duress and are not worth the paper they are printed on.”
    So far, no court has ruled that the shelter transactions themselves were improper – a fact that lawyers for the accused former KPMG partners were quick to emphasize.

  • Carrie Johnson on the Indictments
  • Attorney General Alberto Gonzales’ statement
  • Michigan’s Senator Carl Levin commented:

    Senator Carl Levin of Michigan, the senior Democrat on that committee, said in a statement that KPMG’s agreement and the indictments “send a powerful message to the promoters, aiders and abettors of abusive tax shelters that they can no longer expect to be let off the hook.”

    I find Levin’s statement somewhat ironic, given the recent evidently unintended huge SUV tax subsidies that provided a significant benefit to Michigan manufacturers at the cost of national fuel efficiency and lost tax income.

Ironically, the Supreme Court overturned the US Department of Justice’s indictment of Andersen, which cost thousands of people their jobs:

While hearing arguments in Andersen’s appeal, Justice Antonin Scalia at one point described the government’s theory of the case as “weird,” according to The New York Times.
What’s more, the justices “were so clearly sympathetic” to the former Big Five accounting firm, that the only question remaining at the end of the session was how quickly the Court would overturn the conviction, the paper added.
Of course, even if the conviction is overturned, it would not be much help to the thousands of former employees who lost their jobs and the former partners who lost their equity.

Real tax reform is long overdue. Will we see it from our politicians? Unlikely, when both Feingold and Kohl are supporting bills like this very large, multinational corporation tax giveaway.

I’ve known Bob Pfaff, indicted today, for 20 years and have always found him to be a great friend and honorable man. I’ve posted a few items on this previously here. The recent Kelo Case is also worth watching in this context.

The Oil Drum: Katrina Introduces Peak Oil to a Nation

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The Oil Drum:

Katrina IS a big deal today and will be for weeks to come, not just because New Orleans is below sea level and not just because she could cause massive loss of life and property, but because Katrina could also disrupt Gulf supplies of petroleum (the GOM supplies around 1.3mbpd, we use around 20mbpd in the US) from rigs, refineries, and pipelines, etc., for a while.

Great Site, via John Robb.

Identity Thief Steals House

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Plastic:

James Cook left on a business trip to Florida, and his wife Paula went to Oklahoma to care for her sick mother. When the two returned to Frisco, Texas, several days later, their keys didn’t work. The locks on the house had been changed.

They spent their first night back sleeping in a walk-in closet, with a steel pipe ready to cold-cock any intruders. The next day, they met the man who thought he owned their house, because he had put a US$12,000 down payment to someone named Carlos Ramirez. The Cooks went to the Denton County Courthouse and checked their title. Someone had forged Paula Cook’s maiden name, Paula Smart, and transferred the deed to Carlos Ramirez. Paula’s identity was not only stolen, but the thief also stole her house. Even the police said they’ve never seen a case like this one, but suspect the criminal was able to steal the identity and the house with just Mrs. Cook’s Social Security number, driver’s license number and a copy of her signature.

Via Bruce Schneier who points out that the National ID card (supported by our good Senators Feingold & Kohl) won’t solve this problem:

This is a perfect example of the sort of fraud issue that a national ID card won’t solve. The problem is not that identity credentials are too easy to forge. The problem is that the criminal needed nothing more than “Mrs. Cook’s Social Security number, driver’s license number and a copy of her signature.” And the solution isn’t a harder-to-forge card; the solution is to make the procedure for transferring real-estate ownership more onerous. If the Denton County Courthouse had better transaction authentication procedures, the particulars of identity authentication — a national ID, a state driver’s license, biometrics, or whatever — wouldn’t matter.
If we are ever going to solve identity theft, we need to think about it properly. The problem isn’t misused identity information; the problem is fraudulent transactions.

RFID Commercial Research at the UW

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Ryan J. Foley writes from Madison, WI:

What makes UW-Madison’s lab unique is its collaboration with industry and its focus on the physics and engineering behind the technology, said Sweeney, who has visited other RFID labs elsewhere.
Critics worry, however, that UW-Madison is contributing to technology that could ultimately track humans.
One such fear involves the use of tags in clothing and shoes. If the chips aren’t deactivated at the time of sale, unsuspecting consumers might essentially be carrying around information about their buying habits, allowing stores to target them with intrusive marketing pitches the next time they visit.
“When I see the move of RFID into universities, it concerns me,” said Katherine Albrecht, a privacy advocate who specializes in RFID technology and shoppers. “It is sending a message that not only do we not have to worry about privacy but you can profit from it by a career perspective.”