Tax Me If You Can (full documentary) | FRONTLINE

it's a shell game corporate America's hidden profit Center the tax shelter business has become basically stealing from the treasury hide and seek against the IRS these were close to Sham transactions some were clearly sham transactions when they didn't pay the burden fell on us these guys are just complete freeloaders on the rest of us they're paying a whole lot less than they used to and the rest of us are picking up the tab form you could double everybody's refund if you just collected all the taxes that are due tonight on Frontline correspondent Hedrick Smith follows the tax shelter Trail to surprising places so this uncovering the companies behind the tax scheme First Union North Carolina discovering how the schemes were sold and their response was no this is a clean deal we're using the IRS laws against them and unveiling what's really going on inside America's biggest tax firms the elements of hiding the facts were really just blatant at that point I really realized some of the stuff that these guys are doing may very well be criminal tonight on front line the Great American Tax Dodge [Music] thank you tax season and the returns are starting to roll in at IRS centers all across the country but there's a problem not everyone is honestly paying what they owe some big time taxpayers are gaming the system with illegitimate tax shelters and sticking the rest of us with the bill well my reaction is you know more people are buying into the stuff than than I thought you know and of course the the magnitude of it was was was very very substantial Republican businessman Charles Rosati recently spent five years as commissioner of internal revenue while running his own technology company Rosati had seen some dubious tax schemes well of course having been in business I mean I had had people you know come in and try to sell me various things I always believed in business if it's too good to be true it probably is too good to be true but inside the IRS Rosati was shocked to see how severely the epidemic of bogus tax shelters had infected the tax system I think it's a huge danger to the tax system what we learned from our agents what we learned from the tax experts what we've learned from the honest practitioners was was true there were a heck of a lot of promoters marketing a heck of a lot of devices through a heck of a lot of Corporations to shelter income so they wouldn't pay corporate taxes it's a far cry from what you and I do we struggle to hold down our taxes with legitimate deductions IRAs mortgage interest on our homes but major corporations in boom time millionaires zero out their taxes with tax tricks and who cooks up the tricks highly respected accounting and law firms the very people we trust to keep the system honest so you and I wind up paying the difference not just for shelters but for the entire tax Gap the whole problem is anything that's that's not being paid that should be paid I mean that's basically what the honest taxpayer is making up that's that's you know somewhere in the range of 250 to 300 billion a year which basically means that everybody is paying 15 more if you want to look at it that way 15 is a big chunk yeah you could give everybody twice as big a refund as they average you get if you just collected all the taxes that are due and how big a part of this is the tax shelter problem that is certainly the biggest single source of the uh Gap [Music] thank you they don't exactly hand you a road map to help you find these well-concealed tax shutters which turn up in the most unexpected places our search begins in the industrial Heartland of Germany the city of Dortmund where in late 1997 City officials were offered a deal they couldn't refuse it's absolutely unbelievable I still to this day can't believe that something like this works Dortmund would get 10 million dollars cash like Manna From Heaven for agreeing to lease its old street cars to an American company we give this three cars to the USA and then you lease them back so we can still use them here cars to a U.S investor and instantly leased them back so Dortmund still owned and operated the streetcars nothing really happened it's called a Lilo Lee sin lisao do you snuck before it is the same as before yes it is very hard to understand if you are not from the banking business it was hard to understand why would an American investor pay 150 million dollars to lease 25 year old streetcars that stayed in Dortmund I found an expert a German lawyer who works with U.S investors on cross-border leasing deals Dr Marcus winsirski what is a cross-border leasing deal what does it involve well the basic idea is to create a tax benefit for a profitable a U.S domicile company for example banks financial institutions or whatsoever it's a huge business more than a hundred billion dollars in Germany alone over the past five years when cersky helped me understand how a deal works if I understand you correctly the lease of the German asset the streetcar system goes to America But the lease goes back to Germany so the Germans continue to run the subway system exactly the car system that's amazing money goes from America to Germany maybe it goes back to a Swiss bank but then it goes back to America is that right exactly so the so the the asset goes away and comes home and the money goes away and it comes home well it's a very simple description but essentially it's right so is it a good deal financially well the the focus is on on the tax benefit of the whole transaction and not on the exchange of of payments or Services the whole point of it is the tax benefit is that right well it doesn't work without detecting well well it it wouldn't work without the tax benefit and that's the driver for the transaction tax benefit came from a fast write-off for the American investors big upfront lease payment but who was the American investor that was a well-kept secret in fact the lease contract required secrecy even Dortmund City officials seemed unsure who was behind the deal you don't know who the investor was none none did you know who the investor was I suspect it was being done through Deutsche Bank or subsidiaries but I'm not sure Richard Bank it turned out was just the German Middleman I wonder if you recognize this document these are official documents from this very meeting the US investor and then what does it say after that in our case it is a big renowned American Bank First Union with headquarters in North Carolina in the financial World banking as we have known it has become a thing of the past brokerage First Union Bank in two decades this upstart Carolina Bank gobbled up a hundred Regional competitors its aggressive acquisition strategy was led by former CEO Ed Crutchfield you simply have to reinvent yourself or change yourself so that you have the ability to compete with that New York crowd who had up till 19 about 90 been eating our lunch that's the main thing it took it was nerve I don't know I mean again took Vision you had to be able to think outside the box a bit all of our financial institutions are in transition so First Union Road the Wall Street wave of the 90s move Beyond standard banking into Investment Banking brokerage and using sophisticated Financial tools like leasing has helped investors seeking diversity leasing it is really just another way of financing you know it's just another era in the quiver it's another financing tool that we that we offer and as to why we would want to do that first for a city in Germany I don't know the specifics of that I read First Union had gotten about a billion dollars in Fast Tax write-ups from a bunch of leasing deals including that deal in Dortmund but as a CEO you were certainly aware it was delivered so I started to ask about the tax write-offs I don't know that I could have told you what it meant to our bottom line do you make a four billion dollar profit a year and something's delivering you a billion dollars Rick if you're going to do an investigative report let's let's change the subject Crutchfield city was unprepared prepare for it right and I've been forewarned about discussing taxes same subject the interview is over and cut off the interview I wrote Crutchfield asking him to take time to prepare and do another interview but Crutchfield would not talk to us neither would the bank so I went to see a watchdog on tax issues Robert McIntyre director of The Institute on Taxation and economic policy he said first unions tax benefits from leasing were huge leasing was Central to their tax Sheltering strategy as far as their annual report reveals from 1997 to 1998 First Union reports that it saved close to a billion and a half dollars in taxes from leasing they were pretty aggressive at Sheltering that was enough to cut its tax rate in 1998 to only about six percent it was almost you know down to nothing First Union had plenty of company bull market of the 90s was a spawning ground for a shelter epidemic that swept through Corporate America as Prophet soared companies were finding ingenious ways to lose money or appear to lose money I saw what was called corporate tax shelters grow in the 90s and I realized in other professionals like me realized it was not what we used to think of as tax shelters in the days of old former Reagan treasury official Buck chapiton was troubled by the new tax tricks these were a different animal these were close to Sham transactions some were clearly sham transactions had nothing to do with investment they simply were Financial mechanisms for creating losses tax losses no economic losses creating losses Phantom losses suddenly became pivotal to impressing Wall Street that alarmed the head of the New York tax bar Harold Handler what changed in the in the 90s was that the tax line of the financial statement became a profit Center for many corporations how do you get your tax rate down exactly that's the uh that that was what what it was all about you know I want to have the lowest tax rate because I can produce the best results for my financial statements in my company and if if the fellow down the street is doing it I should be able to do it also and there was a tremendous amount of pressure to do that and it still is and the pressure was to manipulate the law it may come as a surprise but the law lets corporations keep two sets of books a bullish book income report to Wall Street and a lowball tax income report to the IRS well a company let's say it makes 10 billion dollars that's what it tells the shareholders but when it gets time to filling out its tax return it tells the Internal Revenue Service that no we only made 4 billion or 3 billion because it shelters most of its profits and the result is you know you and I we report our wages all of it nothing we can do about that but companies say hey we're not telling the IRS we made all this money because we don't want to pay taxes on the corporate hunger to minimize taxes revolutionized the tax trade a client would call with a transaction that was being promoted for purposes only to reduce taxes having no business reality that's bothersome because it changes the dynamic of what you're doing you're now no longer doing real things but you're doing artificial transactions for the purpose of reducing tax only artificial transactions and all important dividing line between bogus tax Sheltering and legitimate tax planning the difference is that when your tax planning a business transaction for a corporation is a real transaction there's something that really is being accomplished in the new game of fabricated shelters moving money from box to box the key players for the firms which created and sold tax tricks the tax professionals were the culprits the accounting firms some law firms both good accounting firms and good law firms were in the were promoters of these transactions they would go and sell a product to a particular company and reap a million dollar fee and it became addictive it was like opium as Hewlett package tax vice president for 22 years Larry Langdon was pitched plenty of shady tax schemes and there were a number of of CFOs CEOs and others who realized what was going on and it was wrong but but frankly I would say a a fair number almost half of the major companies were succumbing to that sort of pressure the increase in abusive shelters and use of legitimate deductions was fueling an even bigger Trend a sharp decline in corporate tax rates according to public records while on paper the corporate tax rate is 35 but because there's so many loopholes so many shelters well we did a study looking at companies through 1998 the 250 are the biggest and their average rate by 1998 was 20 not 35 and lately we think the rate is down to about 15. in other words companies are paying less than half of what they're supposed to some companies paid zero taxes others even got tax rebates and as the corporate tax payments plummeted so did the corporate share of the total tax take from 1950 to 2000 corporations have averaged about 17 percent of the federal taxes and all of a sudden now down to seven percent seven percent of the government paid for by corporate taxes so so yeah they're paying a whole lot less than they used to and the rest of us are picking up the tab form and what was the IRS doing about all this in the late 90s the IRS the Charles Rosati found was in a state of Crisis deeply on the defensive just as the sheller epidemic was taking off Congress attacked the IRS and cut its budget it was in a situation where people were a little bit hunkered down they were they were like people that were in a foxhole with a lot of incoming artillery shells uh coming in the IRS pulled in his horns it was so hopelessly understaffed and outgunned that razadi said it couldn't even keep up with tax cheats the IRS you know simply does not have enough resources broadly to cover even the most serious compliance cases which means that you know people are robbing banks on all four corners will only be able to stop one Robber to try to combat tax shelters Rosati enlisted one of the tax trade veterans hewlett-packard's Larry Langdon I wanted to tackle the tax shelter problem and I found that the IRS was way behind the times with regard to what I knew was going on in the corporate sector we were playing you know like man-to-man defense I mean the IRS was like taking a knife into a gunfight I mean you know we had one you know a couple of Agents you know here fighting against uh you know major well-staffed well-organized corporations and tax advisors worse it was so overwhelmed by paper that it couldn't even spot the phony shelters Tax Lawyer and analyst for the journal tax notes Lee Shepherd finding the transactions is a problem I mean if you're talking a Fortune 100 company the return would be floor to ceiling paper even if you're under continuous audit it's not like the corporate tax manager is going to say oh look over here here's the tax shelter that's not what they get paid to do I mean I don't want to apply that everybody's always hiding the ball but sometimes you know hiding the ball is what you're trying to do hiding the ball remember that street car deal in Dortmund they hid the investor they bury the shelter in tax returns that's why the IRS had so much trouble tracking the leasing business IRS agents just stumbled into the first hints of trouble while screening returns you could see the leasing activity changed we didn't know what kind of change it was we just knew taxpayers were getting more heavily involved in leasing they got lease it back so they got to make a payment Carrie Allen the senior tax auditor at the IRS Center in Charlotte North Carolina was like Sherlock Holmes trying to unravel the leasing deals and we saw a change in the trend for description of leasing it was going along at a certain rate per year then we saw a kind of like a graph that goes up so big jump in activity well it starts slow and then start Rising so you knew there was a change in business practice a change that involved big tax breaks they get up to 100 million dollars a transaction 500 million and some of them end up being billion dollar transactions there are a number of Heroes in this whole exercise and Carrie Allen is one of them he discovered on the part of the IRS the first leasing lease out transaction and frankly he was tenacious enough to pursue it understand all of the documentation and put the jigsaw puzzle together we said we gotta get an answer to this this is a problem because it appears to us as agents nothing is really happening here that this is not really a lease like we've ever seen before so this is all going to circle so this draws our attention Allen is forbidden to talk about specific companies or tax audits but he's sketched out a typical Lilo deal it's part of the transaction I'm not going to count it for tax purposes it's complicated but he showed me why he believed it was a sham financial transaction we don't think anything's going to happen or nothing's really happening because paper shuffling without genuine business purpose not a legitimate shelter they really don't have to move any money they're just making journal entries it's the circular flows of money basically remove the risk out of the transaction uh the money was not used like you normally see in a leasing Arrangement well and that that's just plain wrong Ken Keys is a Capitol Hill veteran now a spokesman in Washington lobbyist for the leasing industry working hard to protect their leasing deals they're very complicated transactions they're heavily negotiated they in each case they have legal opinions from very reputable law firms those transactions vary comfortably fit within 30 years of leasing law weren't the American investors getting their major gain out of the tax reduction benefit of these cross-border leasing deals well the answer is that that's certainly a significant part of it and that's true in every lease I mean and it has been for 30 years but the IRS did not buy that argument an audit it challenged 300 lilos by more than 30 Banks and corporations in May 1999 it issued a regulation specifically barring lilo's in effect what that did was create a major chill with regard to selling any of those transactions in the future so we killed it for the future in all the IRS banned more than two dozen types of tax shelters it even won a few court cases against big corporations but it was like Canon Mouse always a jump or two behind so hasn't the IRS banned about 28 transactions put them out in a public list and said these won't work yes but as fast as the IRS could publish that list the promoters can come up with transactions that are different sufficiently different that they don't fit within that those those guidelines so they changed a little thing here and changed a little thing there and that's right that's exactly right and it's a constant game it just keeps going on and on [Music] so Joe tell me where are we we're at Marina Bay in Fort Lauderdale Florida yeah the promoters had found a new market a new Niche for their tax tricks individuals who struck it rich like entrepreneur Joe jackaboni and what kind of crew does this have you got a captain captain an engineer first mate two stewardesses and a chef wow so you got the whole works yes yes it's a five-star hotel on the water and this is the uh this is the sun deck oh great so you must have done well in business to wind up with a boat like this tell me about your business well in 1991 I pretty much leveraged everything I owned borrowed money from everybody I knew and uh started the company on about fifty thousand dollars his company which provided tech support for the skyrocketing computer industry took off and six years later jacobony cashed in how much did Cincinnati Bell pay uh the end the the final price was 32 million dollars 28 million of it was mine and I put the money in the bank and who was your Banker First Union First Union was your Banker yes sir who are we we're First Union helping our neighbors in every way we can so it was amazing how many people came out of the woodwork that had great ideas what to do with the money they had been a trusted bank for many many years with me and so I pretty much kept the money with them First Union steered giacomoni into a tax scheme devised by the bank's own auditor one of the country's top accounting firms and one of the most aggressive in marketing tax shelters KPMG I got a phone call from the senior tax person at KPMG Carolyn Brennan and they just told me that this is an investment strategy and that it was going to cost me X millions of dollars what KPMG called an investment strategy would cost jacobone 2.4 million dollars but it would eliminate all of the capital gains tax he owed on the sale of his company more than seven million dollars I asked him questions like has this ever been audited and their response was no this is a clean deal we've done we've done numerous deals like this with people that are in exactly your situation it's never been audited so they're saying this is perfectly in compliance with IRS rules and regulations absolutely absolutely the word bulletproof was used at one point in time to seal the deal KPMG promised the blessing of a top shelf Law Firm the terminology they used Rick was there was a more likely than not chance I would win an audit but off the record their attitude was Joe you have no problems we're KPMG we would never do anything to put you in a position to where you would be in trouble with the IRS all the same KPMG wasn't taking chances of the IRS finding out it told jacoboni to keep it all confidential he says he couldn't even show the deal to his own accountant because they said it was proprietary that they had created it and that uh they they just were not they were not going to share it with anybody in September 1997 jacobone took the leap he ponied up his 2.4 million dollars where are you sending this money to various and Sundries situations I sending it to a company called Jacaranda corporation which is um I have no idea and where is it of Cayman Islands and what do you think it's doing quite honestly Rick I didn't know what the transaction was done all I knew was KPMG was managing the transaction and telling me you need to put this money here put that money there to check out Jacaranda I flew to Grand Cayman Island an international tax Haven where you can set up and disband a company in a New York Minute [Music] once the Sleepy British colony came in today claims to be the world's fifth largest financial center with one trillion dollars a year in Bank turnover Jacaranda had been created as a conduit for the KPMG tax scheme sold to jacoboni in the hunt for jacobones came in company my first stop was the government registry of companies I'm looking for information about Jacaranda Capital it's a company yeah Jacaranda Capital so it's a company was set up in 1997. well let me see if one of the assistance is available because typical Wall Street information about company operations and owners was not available but there was a listing of jacaranda's registered office the local law firm of Maples and Calder so I went to see its managing partner Anthony Travers how many lawyers do you have working here in this office we have about about 250 hand we have 10 loans in London we have 10 laws in Hong Kong so you have about 250 in this area yeah exactly including including I'm interested in the company it's called Jacaranda Maples and Calder was listed as its registered office can you help me find out about that company can you tell me anything about that I really can't because of the legitimate right the Privacy can you tell me anything about who its directors are can you tell me can you tell me about what its purpose of business is no um what can you tell me it so happens that that is what the confidentiality law says it Endeavors to establish a a right to privacy and actually I commit a criminal offense if I breach that law that was a dead end so I asked Travis to take a look at some documents we had turned up I'm not going to ask you how you got these [Applause] there were minutes of jacaranda's first board meeting two attorneys from Travers Law Firm had Incorporated the company I asked about it two listed directors they are directors of an institution in the Cayman Islands which is in the business of providing directors which is this one listed here Queensgate Bank and Trust Company Queensgate Bank and Trust Company whether they provide directly yes they do so if you're in America and you want to set up a company and you don't want to have to come here and you want to have directors you go to Queensgate it provides independent directors who so Jacaranda was not just a ready-made company it had ready-made directors this is this looks like a fairly standard corporate transaction having flicked through these papers um so this happens dozens of times hundreds May well be yes and Travers Law Firm had cozy ties to jacaranda's director what's interesting to me is the address of the of the meeting of the board of directors is the same as the address of your Law Firm I think if you look out of the window and you'll probably see them in the building next door but I mean at the time this was happening they were on another we're actually tenants of theirs what's more Traverse said his firm had little reason to look too closely at Jacaranda and its business dealings because KPMG vouched for it you mean it wasn't your response it wasn't it wasn't our primary obligation or responsibility to redo the engineering in relation to manners of U.S taxation or to look that closely at a jacaranda if it came to you from KPMG I think if it came from KPMG we would make certain assumptions about propriety of the transaction yes that's great back home jacobone made similar assumptions about KPMG but around the time he bought into kpmg's tax scheme IRS lawyers were starting to take a dim view of such shelters called basis Shifting the scheme involved a quick in and out stock deal by the Cayman company that supposedly generated Phantom paper losses for jacoboni to offset his real capital gains it turns on a legal construct that that creates a loss you go through two legal entities and have a liquidation and generate an artificial loss that's the substance of a basis ship however you want to characterize it you are talking about a transaction that but for the tax you would not do well is this thing a sham is this a distortion of the law is this turning the rules upside down and twisting them twisting the rules yes it is it is twisting the rules for three years the government's probe in the basis shifting schemes went unknown to Joe jacaboni then the bombshell a notice from the IRS jacoboni frantically called his KPMG advisor Carolyn Brannon we started the conversation out with you know I can't believe this is happening you know Carolyn tell me why what what went wrong did they have a case and Caroline's response was Joe they're so stupid they can't even figure out this deal they've been trying to figure it out for two and a half years as a Caroline two and a half years I said this is August of 2001. are you telling me that you knew the IRS was questioning this transaction in the beginning of 1998 there was silence on the phone well well they've been aware we've been aware that they knew about this transaction and they have not been able to figure it out since then did she say anything how you would do in an audit that was my next question is is like well you know am I going to lose The Oddities most definitely your Luciana she says you're going to lose the audit absolutely so now I am absolutely going ballistic and like I'm seeing 7.2 million dollars God knows what the interest rate was going to be 40 penalties and I'm like Carolyn you know I'm gonna fight it Carolyn Brannon referred frontline's questions to KPMG KPMG declined an interview in a court document it denied jacobones version of events but jacoboni says KPMG recommended that he pay the taxes he owed then sue the IRS um you guys are going to defend the audit for me of course Joe will defend the audit I'm like are you you guys are going to pay for this right of course not Joe they're not going to pay no she said Joe you are responsible for an audit you're gonna have to pay us for it that was too much for jacobony he decided to sue not the IRS but KPMG that's when he learned from internal KPMG memos that KPMG quality control had long held grave doubts about the tax scheme sold to jacoboni a basis shifting scheme called flip but uh quote Larry delap determined that KPMG should discontinue marketing the existing product the existing product was the dla sold you flip it's called flip right so he's saying that in the fall of 97 their quality guy is saying to the rest of the outfit in KPMG stop selling this thing right and I believe it was sometime in September before they even sold me the program that they were told to stop selling it so they're selling you stuff that they're saying internally they know doesn't work right their fees were more important than their integrity and honesty to their client of protecting their clients so let's keep on selling it if the IRS doesn't audit it we're fine and KPMG did just that it sold more than 160 wealthy individuals the same deal as jacoboni including the late race car driver Dale Earnhardt and William Simon former Republican candidate for governor of California so a lot of folks are going to look at this who haven't been as fortunate or as successful as you are and say hey Joe you made 28 million dollars you were just trying to get out of your taxes Rick I did what every American does every year we go to tax accountants because the code's so complex that they have to interpret it so I trusted the quality and reputation of one of the largest accounting firms in the world I guess you can't even do that anymore I don't know who you trust the same completely identical first it was sheep now it's tax advice everybody was in the game at KPMG tax shelters were top priority the firm's hottest profit Center the whole culture was driven by sales this sounded like a great idea for supercharging the tax practice stop waiting for people to call you and give them an answer let's go out and sell a lot more product let's get out there and sell it proactively tax lawyer Mike hammersley witnessed the KPMG tax shelter machine from the inside in 1998 he was wooed away from Ernst Young I thought it was a good opportunity I had friends at KPMG I was excited to uh to to come over and work with them and work in this field they were well-respected people hammersley joined the Brain Trust of the KPMG tax practice the Washington National Tax Office and right from the start what he saw bothered him actually the very first project that I was given was a tax shelter a very aggressive tax shelter what I was shocked about was the willingness to accept facts and representations that they knew to be false hammersley recalled having told KPMG colleagues that their shelter schemes wouldn't work legally one of the ways in which you can identify as a tax shelter is ask yourself would anyone in their right mind do one of these transactions but for the tax benefits or if those losses were real losses would anyone do that would you be able to sell that and the answer almost always is no hammersley said kpmg's hottest shelters were hush-hush even to insiders the most abusive tax shelters were fairly clandestine not destined because because they're really ugly stuff they would they were there's restrictions on access they didn't want their own people to know they did not want their own people to know what's going on here what's the practice here and why is this happening one of the things that's going on is not wanting the strategy to leak out to another promoter the other thing is is not wanting it to leak out to the IRS keeping the IRS in the dark was critical to kpmg's sales strategy The Firm calculated that it would be better off financially to ignore IRS requirements to register its tax shelters the penalties associated with not registering paled in comparison to the revenues that would be generated by this tax shelters that had to be registered and if they were registered KPMG decided they couldn't sell them so they made a business decision not to register them in internal memos KPMG made the cold calculation that penalties would be less than 10 percent of its fees business flourished revenues at the tax practice climbed to more than 1.2 billion dollars a 45 jump in just three years and the more money KPMG made the less money Uncle Sam collected the fees that KPMG got was determined specifically and exclusively on the amount of tax savings that they generated for the tax shelter purchase this to me was the nail in their coffin the the phony deceptive device that they created was profitable to them to the extent to which there was a loss the greater the loss the greater the money the KPMG made it's hearing of the permanent subcommittee on investigations is called to order Senator Carl Levin of Michigan spearheaded a probe of tax shelter abuses by the Senate permanent subcommittee on investigations the testimony today will also show the links to which KPMG went to hide its tax products and its sales efforts from the IRS last fall the committee called major accounting firms on the carpet KPMG Ernst Young pricewaterhousecoopers the others apologized and we have learned from our mistakes KPMG insisted it had done nothing illegal it's true that these strategies were complicated and that the tax consequences turned on careful and detailed analyzes of Highly technical tax laws regulations rulings and Court opinions but all of these Tax Strategies were consistent with the laws in place at the time but after a year of probing thousands of company documents Levin was unconvinced we found a very pervasive use of tax avoidance schemes that were designed and cooked up and concocted by Otherwise supposedly legitimate accounting firms and investing firms now you focused in your investigation heavily on KPMG why KPMG we had subpoenaed a lot of materials from a lot of firms and we decided that this was one of the worst perpetrators perhaps the biggest shock was kpmg's crass marketing instead of letting clients ask for tax advice KPMG set up a telemarketing Center to cold call new prospects I mean it's pretty obscene to me that you got to firmly KPMG that goes through telemarketing to persuade taxpayers who made a big capital gain or made some big income that they can reduce their tax bill if they'll follow a scheme which KPMG is devised and hammersley reported that the KPMG High command was calling the shots on sheller promotion it was driven from the top it was coming from the top guy in the tax practice Jeff Stein they would have conference calls where he would demand an explanation of why you were not adequately selling the tax shelters Stein did so well with the tax practice that in 2000 he was promoted to number two in kpmg's entire U.S operation Jeff Stein's objective was to change the mind frame of a tax professional from finding problems with transactions and trying to address them objectively to going out and proactively selling tax shelters and trying to close sales Stein and top KPMG Partners declined to be interviewed by Frontline but Mike hammersley by now a senior manager in kpmg's Los Angeles office said things went from bad to worse the activities got more and more aggressive and the elements with a particular promoter in the Los Angeles office the elements of hiding the facts were really just blatant and that that's when it really finally hit home wow you know some of the stuff that these guys are doing may very well be Criminal anyone home uh went home uh thinking uh you know how did I get here this was an industry that survived in the past prior Generations on uh on its ethics and integrity how did the how did the industry get here and how did I get here this was just not what I bargained for the defining moment hammersley says in court documents came when KPMG superiors demanded that he sign off on Tax Matters that he considered illegal a charge KPMG disputed I had no choice I had to blow the whistle and uh um you know the consequences that result were expected in October 2002 KPMG put hammersley unpaid leave hammersley sued KPMG charging the firm had ruined his reputation a settlement was reached kpmg's tax services and offerings last fall KPMG which is facing federal investigation told Congress that it had stopped Mass marketing aggressive tax shelters we no longer offer or Implement aggressive look-alike Tax Strategies in a corporate shake-up it removed several key tax partners as for my cameras KPMG said he wasn't qualified to discuss tax shelters because he hadn't been involved although I wasn't directly involved in the marketing of the tax shelters I got a close look at many of the strategies and I was surrounded by the people who were directly involved in the shelters That's the basis of my information you don't have to be a bank robber to understand and and observe a bank robbery [Music] remember the bogus leasing deals the IRS thought it had shut down in 1999 well the industry adapted and in Paris last fall I found leasing industry insiders gathering at a five-star hotel for a conference on cross-border Leasing leasing lobbyists can Keys flew in from Washington the people primarily represented here are people that help structure the transactions they're from all over the world there's people here from Australia the United States Europe number one how important the leasing industry is to the U.S economy and second many were eager to hear Keys tell them how changes in American tax law would affect their future deals Keys assure them that the leasing industry had the ear of powerful U.S lawmakers we were very aggressive at going and meeting with every member of the House leadership from speaker hastert through Tom DeLay who's second in charge Roy blunt who's the third in charge I was surprised by how many new opportunities the leasing industry had found so it looks like the leasing business is doing real well in Europe right now it's in the many billions of dollars I would guess 20 30 billion maybe bigger so there was still plenty of assets to lease in Europe and how is the industry planning to stay out of trouble with the IRS took a while back in Germany I found one in the city of bochum just 20 miles down the road from Dortmund like many cities bochum found itself in a financial pinch in 2002. we didn't have enough money to do all the things we had to do as our duties as a common Community to the people in bochum so we were looking for ways out of that dilemma and one of them was the idea of trying to go get into a financial deal on the way of cross-border Leasing the idea of cross-border leasing wasn't unusual what was unusual was the city asset that U.S investors wanted to lease Mr albach where are we right now we are standing in the bokham sewer system which is about 1200 kilometers long and close to downtown bochum the bokham lease wasn't about streetcars they have leased the pipes there are different tubes different parts of the system so camera boys this is not Industrial Waste it is only from people by leasing its sewer pipes for half a billion dollars welcome got a 20 million dollar fee but vice mayor Gabrielle reidel opposed the deal why do you object to the cross-border leasing deal well one thing it is only a deal for a tax shelter in the United States and I say it is a bad example to the people in bochum because I want them to pay their taxes honestly so so you think the the main reason for this deal is attack shelter in America yes I'm sure this is also what was told to us who are the American investors do you know no I don't know we were not told who they are they told they don't want to be named and so the city accepted that the city council accepted that yes we were told if if we want to make the deer we have to accept this but Frontline has learned that the U.S investor in bochum sewers was first Union is now Wachovia Wachovia an uncommon approach to banking well Wachovia amazingly in 2002 even though it reported four billion dollars in profits reported that it didn't pay any taxes and in fact got a tax rebate from the government of about 160 million how much were they actually writing off from leases at Wachovia well they said they saved three billion dollars in taxes over the last three years from leasing so huge write-offs but if Lilo leasing deals had been banned by the IRS how could Banks like Wachovia still be working that angle to cut their taxes while Covey declined to talk to Frontline so I asked that German lawyer the reason is we started with the with the Lilo deals Lee's Italy's out structures then certain changes in the American tax law happened which made our colleagues in the United States from the tech side saying that we better should move to a service contract structure well they've changed the structure instead of a what we call the Lisa and Elise out they've changed the structure a little bit but from what we can tell at this point they're still doing something very similar that they were doing with the lalos I don't think the government's going to get serious but leasing lobbyists can Keys disagrees these are different transactions they have different terms the economics are different and a different set of rules apply so the industry moved to something that it evolved the industry evolved is a way to put it they are doing a different economic transaction which is governed by a different set of tax rules well the guts of it is very much the same as it was before you've still got you've still got nothing going on and your American corporate customer basically buying itself some deductions they happen to be depreciation deductions rather than rent deductions but you're still just buying deductions is it correct that the basic structure of the deal is essentially the same even though on the surface one looks like a Lisa and Lisa and the others call the service contract yeah I I would say so it's it's a basic the basic structure is a lease structure and there are certain amendments which have to be made just to make it possible to enjoy the tax benefits same structure same problem something didn't smell right it was hard to see the economic substance and business purpose down there in the bochum sewer cleaning up the mess of illegitimate tax shelters is still unfinished business in Washington and Charles Rosati is worried I think this thing is going to rebound especially as the economy improves the fundamental drivers of this are still still there I mean it's still a very profitable business for the promoters there's still a tremendous amount of tax that can be saved the law is still way too weak and too murky Rosati says Congress must take strong action pass legislation Banning tax shelters with no clear business purpose and economic substance Congress has to say it plain and simple you know plain and simple that you know if you're just doing a transaction that's structured for tax benefits that you wouldn't do in the absence of the tax benefits then then it's then it's a tax shelter and it's it's not legitimate I say to the hucksters it's time to find an honest living Republican Charles Grassley of Iowa led the gop-dominated Senate to pass a bill that includes an economic substance Rule and stiffer penalties for shelter promoters but industry is fighting that bill you're talking about powerful accounting firms powerful legal firms powerful investment bankers in a conspiracy to promote these tax shelters they also have a fourth arm they hire someone the most powerful lobbyists in town to work against this legislation so broad tax shelter reform remains bottled up in the house Ways and Means Committee the Bush Administration proposes closing some loopholes in stiffer penalties but some say that's just not enough Congress needs to act they need to outlaw tax shelters period he needed also the administration whoever is in power to go after these guys to call in these guys to call in the heads of the accounting firm the heads of the accounting practice and the law practice they ought to be called into the White House and say this is shameful stuff folks this has got to stop oh [Music] next time on Frontline today Iraq is free it was a stunning military success Coalition forces toppled Saddam in just 22 days but when the invasion was over the war had just begun when you decapitated the regime everything below it fell apart did the pentagon's miscalculations and how it fought the War create this brutal peace the invasion of Iraq next time on Frontline to water front lines tax me if you can on video cassette or dvd call PBS home video at 1-800 play PBS [Music] support for Frontline is provided by U.S news and World Report Trust for over 70 years a commitment to playing it straight getting it right U.S news and World Report trust matters partial funding for this program was provided by the Nathan Cummings Foundation line is made possible by contributions to your PBS station from viewers like you thank you foreign [Music]

Channel: FRONTLINE PBS | Official

Views: 836,367

Keywords:

Id: xLZEhAQx81s

Length: 54min 44sec (3284 seconds)

Published: Tue Apr 18 2023

Reddit Comments

[u/quentin_taranturtle]

I’m a tax accountant by trade. Taxes are often a very emotional, politically charged topic for many people. However, a lot of the wrong words are thrown around.

The IRC specifies that transactions cannot be made without a business purpose. Avoiding taxes is not a business purpose, and neither was this egregious former leasing loophole.

In addition to a great explanation of what an actual, now defunct, tax loophole looks like, this 2004 documentary is a great example of why underfunding the IRS is not a good thing. The IRS is a bottleneck for funding nearly every other fed government organization, when the IRS can’t keep up with its job of monitoring compliance, people and organizations shirking their duties slip through the cracks. Consequently rates need to increase and/or the fed government needs to take on more debt to make funding commensurate with appropriations.