Sunday, March 3, 2013
Preet Bharara, the United States Attorney for the Southern District of New York, Steven Miller, the Acting Commissioner of the Internal Revenue Service (“IRS), and Tamara Ashford, the Deputy Assistant Attorney General for the Tax Division of the Department of Justice, announced today that Ernst & Young LLP (“E&Y”) has admitted wrongful conduct by certain E&Y partners and employees in connection with the firm’s participation, from 1999 to 2004, in four tax shelters that were used by approximately 200 E&Y clients in an effort to defer, reduce, or eliminate tax liabilities of more than $2 billion.
E&Y entered into a non-prosecution agreement (the “NPA”) with the United States, in which the company agreed to pay $123 million to the United States and acknowledged a detailed Statement of Facts in which it admitted the wrongful conduct of certain partners and employees. E&Y also agreed to certain permanent restrictions and controls on its tax practice, including a prohibition against planning, promoting or recommending any “listed transaction.” A "listed transaction" is a transaction that is the same as, or substantially similar to, one that the IRS has determined to be a tax avoidance transaction. The NPA also requires E&Y’s continued cooperation with the Government’s investigation. In exchange, the United States agreed not to criminally prosecute E&Y for its participation in the tax shelter scheme. The NPA applies only to E&Y and not to any individuals. E&Y has cooperated with the Government’s investigation into these tax shelters since approximately 2003. In the event that the firm violates the NPA, the U.S. Attorney’s Office may prosecute E&Y.
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:
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.
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