According to the Statement of Facts to which E&Y has admitted, and as proven at the criminal trial of certain former E&Y partners (emphasis supplied by JAT):
Beginning in 1999 and ending in 2002, E&Y, in conjunction with various law firms, banks, and investment advisers, developed, marketed and implemented four tax shelter products called COBRA, CDS, CDS Add-On, and PICO. E&Y implemented these four tax shelter products for approximately 200 high net worth clients in an effort to defer, reduce, or eliminate $2 billion in aggregate tax liabilities. E&Y prepared tax returns reflecting tax losses claimed to have been derived from those tax shelter products and subsequently defended certain of its clients in connection with audits of those transactions by the IRS.
A small group within E&Y known as the Strategic Individual Solutions Group (“SISG”) was primarily responsible for supervising and coordinating the marketing, implementation and defense of E&Y’s tax shelter products. Certain SISG tax shelter products were designed to appear to the IRS to be substantive investments that had favorable tax consequences when, in reality, the products were actually designed and marketed to clients as a series of preplanned steps that would defer, reduce or eliminate their tax liabilities. The typical client participating in these shelters was primarily, if not exclusively, motivated to achieve a desired tax savings.
In order to deceive the IRS as to the true nature of the tax strategies, and to bolster arguments that the transactions had economic substance, some SISG personnel agreed upon and directed other E&Y employees to participate in a concerted effort not to create, disseminate, or publicize documents reflecting the tax motivation behind the strategies, or the preplanned sequence of steps necessary to effect the strategies. These SISG personnel thereby sought to prevent the IRS from detecting their clients’ purposes in employing these strategies. For example, in certain instances, members of SISG falsely portrayed the transactions under examination as purely investment-driven transactions, and falsely denied a tax motivation for the transactions in response to IRS Information Document Requests and in testimony to the IRS.
Further, in implementing the sale of tax shelter products, certain members of SISG also prepared documents or correspondence that falsely and inaccurately reflected events or conversations, and that were designed to improperly influence the IRS’s view of the merits of the transactions in the event of an audit. These activities continued into 2003 and 2004.I have previously discussed in detail the criminal convictions of E&Y related defendants in a series of blogs on the Second Circuit decision in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12). See Major CA2 Decision on E&Y Tax Shelter Convictions (11/29/12), here, which has links to each blog in the series.
See also Robert W. Wood, Ernst & Young's $123M Non-Prosecution Agreement over Tax Shelters: Priceless (Forbes 3/1/13), here. Here are some excerpts from Wood's article:
Back in 2003, E&Y agreed to a $15 million settlement with the IRS over these shelters, and the firm quietly closed up its tax shelter unit that year.
But the criminal investigation persisted, with prosecutors claiming E&Y’s shelters had no economic substance, being solely designed to reduce taxes. E&Y partners and employees produced false documents to keep the government from uncovering the scam, claimed prosecutors. And now E&Y has admitting wrongdoing, saying that its shelter activities represented “an isolated period in the firm’s long history of providing ethical and professional tax services.”
In fact, four former E&Y employees were convicted of criminal charges in 2009 in connection with the scheme. An appeals court threw out two of the convictions based on the sufficiency of the evidence. E&Y isn’t the only accounting firm to face such issues.
In 2005, KPMG LLP agreed to a $456 million settlement to settle tax-shelter allegations. But in E&Y’s case there is now a non-prosecution agreement and a detailed Statement of Facts in which the firm admits the wrongful conduct of certain of its partners and employees. What’s more, the firm has agreed to permanent restrictions and controls on its tax practice.Also, readers interested in the larger context of federal prosecution of entities should review Brandon L. Garrett and Jon Ashley, Federal Organizational Prosecution Agreements, University of Virginia School of Law, at http://lib.law.virginia.edu/Garrett/prosecution_agreements/home.suphp.