Free Response to Cross Motion [Dispositive] - District Court of Federal Claims - federal

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!

JH

' UNITED FOR TEE

STATES

DISTRICT OF

COURT COLUMBIA

DISTRICT

DEPARTMENT DIVISION,

OF

JUSTICE

TAX Case No. MS 02.295

Plaintiff,
Vo

KPMG,

LLP,

Defendant.
X

Washington, D.C. April i, 2004 I0:29 a.m.

Transcript of a Status Hearing Before the Honorable Thomas Hogan United States District Judge APPEARANCES: For the Government:

STUART ISAAC
MICHAEL STEPHEN ROBERT KENNETH MATTHEW

GIBSON, ESQ. D. PAXMAN, ESQ.
ARMSTRONG, ESQ. GARDNER, ESQ. BENNETT, ESQ. GIDEON, ESQ. D. MICHAEL, ESQ.

For

the

Defendant:

Reporter:

JON HUNDLEY Miller Reporting Company 735 Eighth Street, S.E. Washington, D.C.

MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 2000,3-2802 (202) 546-6666

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2

R

0

C

E

E

D

I N

G

S of Justice Case your

®
Tax 02-295. appearances

THE Division

DEPUTY v. KPMG,

CLERK: LLP.

Department Miscellaneous and please. Gibson, the Paxman Michae! to United from state

Counsel, for MR.

come the

forward

record, Stuart for Isaac have is

GIBSON: Division, me I is also who

Department States, the Tax who shelter

of Your

Justice Honor. Division, the IRS

Tax With

and agent,

Malpert, the tax

is

assigned of All KPMG. right,

promoter

investigation THE COURT:

thank

you,

Mr.

Gibson. MR. KPMG Good BENNETT: Good morning, Your Honor.

morning. MR. BENNETT: me is Robert Kenneth Bennett Gideon on and behalf Matthew of

KPMG, Michael_

and

with

THE King & Spalding MR. the lead on THE MR. Arps.

COURT: here, BENNETT: these COURT: BENNETT:

All or

right. just Your now. right. are all

Is Skadden,

anybody Arps? we're

from

No,

Honor,

taking

matters All We

Thank with

you. Skadden,

MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666

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THE

COURT: had

All

right. a that status

I

set call

this on is

matter this.

®

down. This with and we

KPMG ease of the

requested history

has the

a

everyone and I found who asked the

familiar

original logs Judge

suhpoenas that

objections and

privilege that to

inadequate, when to I do I I work and judge, expenses,

sent

Atheridge, him my to and

originally to help us he

appointed preserve was he as a going couldn't matter reinstated his have result and -time

him

this,

judicial get be paid,

resources, and all then the

assumed discovered had never he's done

paid

for

he I so

of

law, as a

unfortunately, magistrate for his

had donated I

him

except paid. then have nature by

®

which

trust The

been was that

in come from

January in the to

the the Court and after in question, with KPMG potential with I the a the the his of

objections a fairly

substantial issued of those status we

report

recommendations very and full now we for review have a

Judge

Atheridge

al! at

the

documents together where some this taken, these

issue,

request indicates ways of

conference to to explore resolve has of

that helping

ought

trying The

government.

government none

think_ in

®

position

that

perhaps

generic,

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4

government's

view, have any tax me

mass-marketed privileges or we are has

commercial attached legal on been in to them of

tax . view. this what with

®

shelters either

from Let

preparers hear know been parts of the --

points the case

at

point° hasn't the --

I don't actually whatever

what

produced,

produced of the

accordance and has to

report Master in go me

recommendations what any it, point I know -of and where this, what

Specia! are can

made,

and

the and

parties where you we

trying to to help decide

resolve

resolve at this

issues

want

the

IRS

has

been

anxious the So at

to

get

@

some of

of

these

documents still being to

t questioning withheld. we are

thousands me hear

documents each Gibson. MR. side

let

from Mr.

as

where

this

point.

GIBSON:

Thank

you

very

much,

Your

Honor.
Since we have been Mr. meeting, Our Christmas filed Bennett and first Eve their has we come have into been took after and the the case,

exchanging place the since then that the

correspondence. day before had been

meeting last year

parties

objections, to narrow

®

we

have

attempting

issues

MILLER REPORTING COMPANY, 735 8th Street_ S.E. (202) 546-6666

INC_

Washington, D.C. 2O003-2802

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are

necessary I will

for

the

Court just as may

to a

decide. matter of that of a we the little have Court's

@
past filed December a

say_ the for

history, motion 22, THE MR.

Court

recal!

reconsideration order. Right. Since privilege then, logs

2.002 COURT: GIBSON:

last with

April, respect

KPMG to

produced the other

additional eight In

summonses. they is eight that have to produced its as log own wel!. a privilege They

addition, log that

privilege claims have those just for

limited summonses privilege !ogs Court

those

supplemented additional wanted to

throughout, and on I

privilege bring we as the

throughout, up a to letter we late have date

that. Mr.

Yesterday Bennett, exchanging how try the could best to we limit in and just

received background, since the

from been

correspondence could what a way And letter decision and narrow the that

December in the case

on to to we

issues .... we we Mr.

Court where

would could

present agree had board waive

Court agree.

yesterday to of us

Bennett KPMG ago to

delivered directors'

a

reflecting days work

of its

two

attorney-client
_i_ ":_'_

attorney

product

MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-61666

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privileges'with the the documents IRS is

respect that relate

to

its to

own

documents shelters

for that

the

tax

investigating. have not waived with the privilege for or that with defense

They respect of this to

communications or the of

counsel

lawsuit to defense in the

investigation, investor in know, claims prelitigation a KPMG. number

with have against

respect been KPMG. have

raised As filed But

litigation Court may

of

investors

lawsuits this we is

against a welcome that will

development, there soon will be

and soon be

we

expect produced documents privilege clear only and

and

understand KPMG had

documents, that to us not it

producing its has to the made IRS own it

previously KPMG's is a

asserted counsel as a

withhold. that to this be to

to and we

waiver as

construed Mr. Bennett

general his

waiver, client

suggested the

that to that the

produce Revenue be the

documents and that also they I

directly think we will

Internal going to

Service, procedure I would that

that's

follow. that the on very be number those small, able to of two

suspect are

documents very narrow

withholding would be

limitations sure Mr.

although

I'm

Bennett

would

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address

that. Given that are a significant few issues development, that remain for Your the

@
Honor, Court to

there

decide. KPMG, from some COURT: GIBSON: that claim it is the of outset, its Right. And KPMG has as are from IRS try know, on made a proxy it very for to Revenue those tax had shelter withheld clients_ the

identities THE MR. clear clients withhold Service. and with to us who

of

serving they

that

entitled the Internal

their Working other that We are to that. The one in and the it

identities -sources does to put the to not one a

has to

worked narrow we eight footnote

internally the are list to of

@

clients one. and second I

and

down

down just

these

summ0nses, in a

want on

little

is a

a tax

corporate shelter of the

client called

that CLAS. that issue, That's is

participated C-L-A-S, before iYour

that's

one We

summonses this the

Court. It was

fully

briefed with

Honor.

briefed

origina!

briefing. THE COURT GIBSON: : Right. It was briefed with the

@

MR.

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motion out to

for _ reconsideration, the Court, we did case of point on this 802, in North out in and that cite

and the

I

did John

want Doe

to v. in

point
i

Wachovia Western also has

Corporation District

that

was

decided last Seventh States v. Court year.

the but I

Carolina that the

year_

wanted weighed 337

to in

Circuit BDO has So that

United the case

Seidman, denied is good

F.3d

Supreme this

certiorari law. And the

United of are

States

District has Seventh case was

Court also

for weighed so

the in. they

Northern Of course,

District they the Arthur BDO

Illinois in the in that a

Circuit, called United last

applied v. as

case,

®

States year

Andersen

decided

well. So that is a say an issue that simple I wanted is ripe for of the law.

Court

to

decide, I did thing, We had

fairly that

question to just

footnote

one

other

indicated reports two had

in last

our

objections Your

to

the

Special that

Master's there were who from in the

December, tax shelter to have of

Honor,

individual attempting and

investors identities lawsuit

been IRS,

withhold filed a

their

the

they

Northern

District

Texast

which

is

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9

currently

pending States we of For

before intervened are

Judge in

Barefoot that

Sanders. lawsuit last

@

The week

United because

concerned of

about

the

imminent

expiration

the this

statute Court's

limitations. we KPMG, privileged. in just are that is that last subject not summons we filed have that, taken number KPMG case, Friday. to a has

purposesr with not

the one, filed as And, a

position, those a

inconsistent identities for fact, those the is in IRS the are summary Your

motion of that that That

judgment Honor,

matter two,

identities issued notice

summons Court. referenced December. remedies really the and case we

before_this that last those and We he has we

2000-44 that We are in

our

objections

pursuing Dallas

before expedited last have on

Judge the Thursday

Sanders briefing on a

schedule. motion to file the their will get we to

entered

intervene,

until the

tomorrow

dispositive Does have until I ruling 4

motion o'clock suspect from

complaint, after hope to that As

and file we I

Monday and Judge I

opposition. a prompt very of the

Sanders. about the

say,

are

concerned statute ch of they

imminent because was

expiration the -first

limitations claim benefits

year

for from

tax

benefits

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10

this

tax 25, from

shelter 2001, today, to be

was the and

2000, statute we by $4-12

and is estimate those

if

they to

have run

filed two of tax to

®

April weeks benefits be

going the two

amount

claimed

individuals

somewhere Thatts The

between my

million. So that that's one before alluded of a a issue. the tot

footnote. issue that of

second

remains just

Court which

is is

something the issue marketed section the record for note,

the whether

Court

purchasers have

generically at they issue and it all under

tax

shelter in And has been by obviously actually and the

privilege that is an

7525(a) promoter. that decision and but we

communications again, fully Court. Mr. had Gideon needs Bennett a that

have on is I

with this ready will

developed

the

can

speak

for

himself, this also

conversation that on they that

morning, that

Mr.

indicated to rule

believe

Court

issue. THE COURT: Do I You this been or the type need don't of to -, need marketing from have alleges you to think bring the any

record evidence and

is

sufficient? in about that's cases --

practices other gone this on

evidence and how

generated that

matters about

hearings government

this

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!I

program

was_ MR.

advanced GIBSON: in terms

by We of

KPMG, have three

and

Brown

and evidence,

Woods?

offered

Kour special public

Honor, agent record by

declarations of has Mr. been

from

the and

_, the

declaration that Permanent

Jacoboni, made

information the Senate

available

Subcommittee

on

tigations. THE MR. and we provided that can COURT: GIBSON: that we take You We to filed judicial committee. is the the second Court issue that we that believe the Court the have offered the in Court offered that, with that? Your our We of the believe actions Honor,

objections the of Court the

December. notice

congressional So that before to rule is a

--

that

is needs

Court

on. subset of and that we issue, are trying for have and to this work KPMG on

There is this not ripe for The indexes of some

decision, other last eight

out.

summonses they a tax 7525 shelter

which asserted

produced behalf

spring,

corporations in certain tax

privilege

for

participating and we of some call the of

transactions, are 6112 what (c)

those

shelter

transactions under section

listed Internal

transactions Revenue Code.

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Section makes to the tax

7525(b) practitioner involving by a

of

the

Code

expressly inapplicable or tax indirect

privilege the direct in the a

communications

participation And tax Code, it

corporation references 6662(d)2 a tax much shelter

shelter. of the

specifically in that of any section

definition

shelter and

(C)(iii)of more is. that avoidance expansive It

contains what plan a or

definition says of of it's its

basically as one

arrangement the

has or

principal

purposes

evasion

taxes. We have communicated of this months morning those with continue section is that not call, about that with Mr, Bennett issue, are in and the those over he

the

last

couple to of and they in This us

that they

reports process clients whether privilege

identifying communicating wish light record make Court in the to of

documents those to

and

clients'about that . enough I will -a for say that the

assert

7525(b) deve!oped although that

the that

Court if

to the

determines these shelters issue other this

these have

participants privilege,

don't then issue

7525(a)

7525(b) is one and

becomes that goes the

moot. Court

There needs to decide,

almost

without

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saying, we KPMG the the then still to Court legal seek

except need comply

that an

I

need from

to

say

it,

and

that

is

order the

the

Court in

directing. whatever what whieh form

with

summonses

determines, obligation sanctions THE MR. COURT: GIBSON: possibly

because to if Al! comply there's right.

that's under not

generates we could

compliance.

Sothat's four, issues record right. Mr,

where for on I

we the

are

right to

now, irule

three, on,

Court of them.

fully THE

developed All review, in. or where

three

COURT: that you

appreciate It was

that.

Thank helpful

you to

for have

Gibson.

®
address view with is of

Mr. the this

Bennett Court

other you MR.

counsel are in

want this and

to your

situation. that has Mr. been

BENNETT: says. change I

I agree think the it

everything obvious there here. I do

Gibson a sea

in

landscape

want going point

to to

address ask chief my

very partner,

briefly Mr. of the Your

a

point,

and who some

then was of

I'm at the The

Gideon, IRS, on

one more one

counsel tax so you not

intricate -that just we

issues, clearly

Honor.

understand, we

the

one

company

have

identified,

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14

really are 2004 So we

can't.

It's

a

Morgan by

Lewis of to

client, January release on that.

and 26_ that.

we

under that are

instructions we just The THE are not

letter

authorized a -I think you stakeholder

really

second COURT:

had

indicated, your thing -you

I

thought that talking reference of any you

I

remembered had your a

reading filing with

through the

Court I

were as a

about here, clients you is

coeval because of to the the on of

relationship, you law had firm, certain the

guess,

information firm to their

law

instructed clients and

information the that That's You grounds group, right.

relating of

withheld one left

privilege, saying?

there's MR. THE

you're

BENNETT: COURT: the

requested but that

that one

they has been

consent refused.

to

production,

MR.

BENNETT:

Yes.

THE MR.
Judge Court that Gibson Sanders, dated we

COURT: BENNETT:
we're September _we

All

right. then the
under 2003, disclose

And
actually llth, cannot

second,
an order

with
of us So Mr. we the

instructing it.

cannot appreciates

the

difficult

situation

that

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15

are the

in same

on

that, ' p o sltion on Your

and

actually that

we

are

sort We

of are

taking in

before

Court.

agreement

that. Honor, on the been I would third point ask Mr. dealing involved Gideon with with to the that

address generic-issue.

you

he_s

directly

THE appreciate try to

COURT: the new this has to

All counsel

right. coming But

Thank in I

you. and

And

I to

helping decide though.

resolve else

matter. be decided

will

whatever Go ahead.

shortly,

MR. think that to

GIDEON: reiterate, what want 7525 the that

Thank we needs to

you, are to be

Your in

Honor.

And

I

substantial

agreement I remaining Stuart, privilege the clients

about just on there's claims the

done. the -what's I believe_

clarify issue, and

also

issue are

of

attorney-client with respect to

pending

themselves. other will talking KPMG on and words, take the care of the of were waiver claims claims the that by that clients has KPMG, were asserting in been but

In referred now we to are by

about behalf there

asserted their

privileges

privileges

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16

addition privilege.

to

7525,

specifically

the

attorney-client

And recollection Your And that, those_ In substantial those the still both order status thing whatever the 7525(a) that Magistrate need parties would of that an Honor, so

to on had

just that,

refresh both

the you some

Court's and of the those Magistrate, claims° your to mind on

sustained absent not be in

obviously we would

your a

changing position

produce

addition, agreement, you ruled reached order. are be those in

though, in were the And order not

where to

we

are

in even and on, the that we -of an

produce

privileged, conclusion think that that the exactly be, don't with and

same so I

agreement to resolve would is I

entry what the

useful

the only that to would as

documents state the that the

I would decision issue govern

believe respect to issue

Court Mr.

made Gibson

alludes

necessarily well. But in the

attorney-client

the

parties' that main the are

position of we of

is

fully and make so is

stated I that

objections that ripe the for

record, want to

think it is

point entry

an

order.

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17

THe reminding summonses. extensively view going like because consistent with the would to the do

only

other is

point there

that are

may eight paid I

be

worth other

Your The

Honor Court

has one

really of them. know it has,

attention think the we that Court would

and our is

examined be that

once the

we one

what then

about

opportunity we might with other And I be the

to able

confer then

with to

Mr,

Gibson an order deal

craft that

Court's as those

ruling wel!. are

would

summonses believe to COURT: address. Al!

really

the

points

that

Ii wanted THE

right. that. you want

Well,

thank

you

very

much. Mr.

I

appreciate do

Gibson,

to

respond

to

that

briefly? MR. Honor. Mr. GIBSON: Gideon is Just right very that claims decision decision the certainly briefly, there that by in Your are are the a few

attorney-client pending. And I also Again, agree

privilege ripe that for the resolve it that I also would issue. agree

still Court.

7525(a)

doesn't issue, resolution

necessarily although of And

attorney-client advise the

that

it

appears

that

once

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18

the

Court

rules log our

on that

the we

privilege have, to it try and

claims would to see go

in greatly

the

one

®

privilege facilitate remaining and didn't I gets guide we once rid the

ability

through we

the agreed

privilege agree can't the on, say,

logs,

what

standing case, of the to

here but rest do it of that

today, would the very

that

it

of

entire

certainly case, and

resolution like Court THE to be

would the

able

promptly

rules. COURT: to All move even to do right, ahead with the that. to suggest if to to each the side parties wants the then as way to I on the Special appreciate the case that, and get

and these

the

necessity donet I and What

rulings

somewhat Master's

detailed

objections rulings,

received we I'm will going

is give they

that me see

it a

may

help

the order should

Court as be I Court the

proposed them how to they I come

the

issues and the

resolved, can in use

depending a template

down, the on

orders the issues

assist

drafting

language not, and

appropriately the It remaining does has seem evidenced to

privilege we Court more have that

or

issues the some

discussed. the change now

of

counsel

compliance

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19

in

KPMG

to'the to in we

subpoenas waive some this get that that --

and of

their

ability own

to

make

decisions assists issue evidence privilege the few

their I I need as

privileges the review at the generic the other

moving to on

along. and as have

think to look

need again

well been

issues

raised, that

and

then

attorney-client Is the government that Judge

issues in

remain. with an out is? little more these in two the order until

agreement issued come

KPMG that he

statement these rules? MR.

Sanders cannot

individual Is that GIBSON: than filed asked a for that. what

names the

situation it's a

Well, Last

complicated

September KPMG restraining basically names, and

®

John and and KPMG Court's every IRS.

Does they a

lawsuit a

against

Dallas order,

temporary

preliminary from disclosing background, other

injunction, those KPMG

to just the

prohibit for names to the of the

has in

disclosed tax

participant

that

shelter

Without to an enforce order the and

the notice

IRS

going

and

filing and in

a

lawsuit

2000-44 the Does

summons to come

getting and that into a

allowing as

participate lawsuit was

intervenors, KPMG and

shortly the Does

after entered

filed,

MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666

Case 1:05-cv-00999-MMS
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20

consent

--; basically said from to -having issue said a you I it

it took to

was

a consent the a onus hearing off

order, Judge and

and _

it

®

basically Sanders whether basically these names

have

decide but it

preliminary are rule I not on

injunction_ allowed the to case.

disclose

until COURT: GIBSON: ago. and Does that them

THE MR. six months

see° And unfortunately that until motion in the it if that we our they the for view that would 5th of was submit March

We it

thought wasn't a and out but is

prompt that

things the John in by

filed case,

summary it They really was an have

judgment attempt

to it's

run not, intent

c!ock. doesn't they with get a

®

insisted matter

that what So

their we are

succeed. all due by

pursuing We hope

haste, next

Your week. I

Honor.

decision

will there

say is

that a

my

understanding in one tax to are either Chicago of the on

is a

this

afternoon summons promoters these names two in

hearing case to

enforcement of John that war that Does case. and

other in which

particular are So we trying they

shelter, withhold fighting today or

their a some

®

multifront

hope

MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666

Case 1:05-cv-00999-MMS
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21

time

next

Week THE

we'll

be All

able right. in.

to

get Thank if Day,

those you. you I

names. I submit like perhaps I think, side on I'm

COURT: your coming

appreciate to you me, to today maybe then be

Then

will would but

being submit -you --

April by could

Fool's income do it

tax in

day, a from to

before would the not

week, each address.

best

proposed you

orders wish single can look me

remaining talking

issues about so

every that in I

document, at with the the

but language tax codes and

generically, make that sure apply, So would ruling file a hope, as I

wenre

accordance

will I

go said,

ahead by my

and tax

issue day, tax

a I'll

ruling, issue I'll a

I

as I'm

filing in right. this

income

return,

ruling All

case. Thank you, that. Could I just wants seek us to a little do? gentlemen, for

coming,

and MR.

I

appreciate

GIBSON: what the

clarification

Court

THE MR.
submit an

COURT: GIBSON:
that

Sure. Does
would,

the
if

Court
we won

want
on

us
the

to
issues

order

THE

COURT:

Yes.

MILLER REPORTING COMPANY, INC. 735 8th Street, S,E. Washington, D.C. 20003-2802 (202) 546-6666

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MR. Court's ruling THE MR. Court's

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GIBSON: -COURT: GIBSON:

--

that

would

implement

the

Yes. -not that would be the

ruling? THE COURT: and point Mr. an to Right. make of view as to Exactly. sure of well be we the on have world, that. to And it that right, and But satisfy see I'll you the -if

yes, I

exactly, your from

accept one

get both needs which

Bennett order these on the

requested to way produce we MR. THE go

issued and

documents, issues,

we'll

GIBSON: COURT:

Thank All

you.
Thank you for

right.

coming

in.

[Whereupon, concluded.]

at

10:53

a.m.,

the

hearing

Was

MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666

Case 1:05-cv-00999-MMS

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C E R TIFI

CA

TE

I, JON HUNDLEY, Reporting proceedings; Company,

the Official

Court Reporter

for Miller the foregoing to typewriting by

Inc., hereby certify that I re_orded have been reduced

that the proceedings

me, or under my direction and accurate

and that the foregoing

transcript

is a correct

record of the proceedings

to the best of my knowledge_

ability and belief.

· i::i_ '_