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Tax Shelters Grant Pushed Open To Scrutiny

Jan 9, 2004 | Kansas City Business Journals

Between 1997 and 2001, two tax partners with Grant Thornton LLP's Kansas City office marketed some of the area's most aggressive tax shelter strategies.

Tax partner Allen Davison's reputation for making taxes go away was such, local accountants and tax consultants said, that clients and colleagues called him "Dr. Poof."

One of his remedies involved using a Roth Individual Retirement Account to help business owners shield tens of thousands of dollars in income from taxation.

Another strategy sought to shelter client income in a tax-free Guam trust. Scott Curtin, who took over as Grant Thornton's managing partner in Kansas City in 2002, said the firm never executed this type of shelter after finding it to be unsound.

"None of those transactions were implemented, and we refunded fees to everybody who paid us any," Curtin said.

Some of the shelters that Davison and former Grant Thornton tax partner Blair Stover did execute, however, could bring unwelcome scrutiny to the accounting firm and clients, sources said. The Internal Revenue Service and Department of Justice have pending summonses in the U.S. District Court in Washington demanding that Grant Thornton turn over the names of clients who used what the government suspects were abusive tax shelters.

The IRS steadily has turned up the heat on tax shelters in general and, on Dec. 31, announced a crackdown with the U.S. Treasury Department on Roth IRA tax shelters that exceed annual contribution limits.

Chicago-based Grant Thornton has denied promoting abusive tax shelters and has refused to disclose its tax shelter clients. Curtin said the IRS's interest in the firm is at least partially related to shelters promoted and executed out of Grant Thornton's Kansas City office.

Davison, who continues to work in the Kansas City area, did not return several phone calls seeking comment for this story. A phone number could not be found for Stover, and sources familiar with the former tax partner said they did not know his whereabouts.

Curtin said company policy prevents him from discussing why Davison and Stover left the firm.

Among the tax shelters Davison and Stover marketed is one called Generating Income Free of Tax (GIFT), which involves the client setting up a shell company that pays dividends to a Roth IRA account.

Although the firm contends that GIFT passes muster with the federal tax code, Curtin said it stopped selling the product a few months before Davison and Stover left Grant Thornton in 2001. He said he figures the Kansas City office sold the GIFT shelter to fewer than 100 clients locally and nationally, about 10 of whom still are Grant Thornton clients.

"(Kansas City) is the only office that sold them," Curtin said.

Grant Thornton overhauled its Kansas City tax practice in 2001, and Curtin since has toned down the local office's tax shelter activity since being named as managing partner. Sources said the IRS influenced the change in direction.

"They were losing clients because so many clients were getting audited," said an area IRS agent who asked not to be identified. "We were giving them a hard time left and right."

On Dec. 31, the IRS and Treasury Department declared that tax shelters involving Roth IRAs will be "listed transactions," meaning individuals who use the strategy must report it on their tax returns. Failure to do so could lead to a 20 percent penalty on taxes owed, said Gerald Padwe, vice president of taxation for the American Institute of Certified Public Accountants.

"The IRS is basically saying, 'We don't like it, and if you go into it, we're going to come after you,'" Padwe said.

Those who invested in Roth IRA tax shelters before they became listed transactions also may face questions, IRS spokesman David Stell said.

"That doesn't necessarily mean an adjustment of taxes," he said.

Curtin said the GIFT strategy, as it was structured, should pass an IRS audit. He's not as certain, however, about how the firm's previous tax team in Kansas City executed the strategy for individual clients.

"About 90 percent of those people that did them are no longer clients," he said. "Where we believe a transaction doesn't work, we've notified the clients of the problem."

Several big accounting firms are feeling government heat for tax shelters they marketed in recent years. Federal regulators and Congress have launched investigations into the tax shelter activities of KPMG LLP and BDO Seidman LLP.

One tax lawyer expects Congress to pass more stringent tax shelter legislation this year. That could lead to more suits against firms filed by clients whose tax shelters have been targeted by the IRS.

A New York lawyer who filed a 2002 lawsuit on behalf of clients who bought tax shelters from Ernst & Young LLP, said he expects an increase in such litigation this year.

"I think the accounting firms that promoted shelters with no business purpose, in conjunction with the law firms who gave legal opinions, should be skewered," the lawyer said.

Most large accounting firms were pitching aggressive tax shelters by the late 1990s, said Art Bowman, owner of Bowman Communications, an Atlanta consulting company for accounting firms.

He said that Chicago-based BDO Seidman started the trend and that other firms followed. Bowman's research shows that from 1999 to 2002, BDO's tax consulting revenue increased from $83.4 million to $144.7 million; Grant Thornton's increased from $102 million to $137.7 million for the same period. He credits much of those gains to the marketing of tax shelters.

"I think (Grant Thornton) just probably went too far," Bowman said. "They were reacting to what the competition was doing to pursue their clients."

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