OPIS tax shelters have been around for a long time. We thought they were long dead and gone but a December 18th opinion from the 10th Circuit Court of Appeals is a reminder that some folks are still trying to argue their legitimacy. OPIS – short for “Offshore Portfolio Investment Strategy” – involves creating artificial “paper” losses for taxpayers by allowing them to claim a large basis in certain assets. These artificial losses offset the actual capital gains. The net effect is to wipeout any tax liability of the taxpayer.
According to the court, OPIS took advantage of a technical rule to allow clients to pay a relatively small amount of money in order to claim a disproportionately large basis and to use that basis to shelter their own otherwise taxable income.
Obviously, the strategy doesn’t work.
The latest court ruling in an OPIS case is interesting for several reasons. First, it shows that there are still some old tax shelter cases floating around the courts. Second, the decision comes from a federal appeals court meeting it carries significant weight. Finally, it involves KPMG, one of the Big Four accounting firms responsible for several failed tax shelter schemes.
This case involves Scott and Audrey Blum. Scott founded buy.com in the 1990’s and later sold stock in the company in 1998, netting a $45 million profit. Not wanting to pay tax on all those gains, he consulted with KPMG. His accountant pitched an OPIS shelter. In fairness to KPMG, the OPIS concept was still relatively new in 1998 and the IRS had not publicly labeled it an abusive tax shelter. (We believe, however, that KPMG should have known it’s strategy would not survive an IRS tax audit.)
The court’s opinion says that the Blum’s paid KPMG $687,500 for its shelter advice. Later, KPMG would prepare the Blum’s income tax return and show a $48 million loss.
The US General Accountability Office (GAO) says that base shifting tax shelters like OPIS cost the government between $11 to $15 billion per year in the 1990’s. Once the IRS caught on, they cracked down.
There is some suggestion that even KPMG knew the OPIS shelter would not withstand scrutiny or a tax audit. The opinion cites one internal KPMG memorandum that went so far as to call the economic substance of these deals “smoke and mirrors.”
With that backdrop, the Blum’s lost the audit with the IRS. They appealed to U.S. Tax Court and lost again. Finally, they appealed to the U.S. Court of Appeals where last month they lost yet again.
In the words of the Court of Appeals, “The intricacies of this offshore financial transaction and the fog of plausible deniability surrounding it cannot make up for the clarity of the big picture: this was a transaction designed to produce nothing more than tax advantages, and the Tax Court was right to uphold the Commissioner’s actions.”
In a sad end note to this story, along the way of appealing the IRS assessment, the Blum’s sued KPMG for its bad accounting advice. A federal district court judge in California tossed that suit.
Our opinion of the end result?
KPMG gave the Blums terrible accounting advice. KPMG scored a quick $700,000 for its bad advice, the Blums lose and KPMG gets a walk.
Don’t face a tax audit without an experienced tax attorney and always get a second opinion before betting millions on a tax shelter strategy. The IRS is sometimes a bit slow but eventually they do catch on and will often retroactively audit previously filed returns. Because the IRS accepts a return containing a tax shelter transaction doesn’t mean there won’t later be an audit.
If you or your business is facing a tax audit, seek professional assistance immediately. Our team of IRS tax attorneys can help defend you in any type of tax audit. From state revenue departments to the IRS, we have helped many taxpayers including individuals and Fortune 500 companies.
For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464. The author can also be contacted at or by phone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege.
Post by Brian Mahany, Esq.
Tag as tax audit, tax audit defense, IRS tax attorney, abusive tax shelter, accounting malpractice