Free Motion to Stay - District Court of Federal Claims - federal

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No. 05-999 T (Judge Margaret Sweeney)

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

EPSOLON LIMITED, BY AND THROUGH SLIGO (2000) COMPANY, INC., TAX MATTERS PARTNER,

Plaintiff
v.

THE UNITED STATES,

Defendant

BRIEF IN SUPPORT OF DEFENDANT'S MOTION TO SUSPENDED PROCEEDINGS

EILEEN J. O'CONNOR Assistant Attorney General
DAVID GUSTAFSON DAVID R. HOUSE Attorneys Justice Deparment (Tax) Federal Claims Section Court of P.O. Box 26

Ben Franlin Post Offce
Washington, D.C. 20044 (202) 616-3366

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Page
T ABLE OF CONTENTS

Brief in Support of Defendant's Motion to Suspend Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction .................................................................. 3

Background .................................................................. 4

Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Appendix:
Declaration of David House
Exhibits
I

Description

KPMG Deferred Prosecution Agreement.
Conspiracy Indictment, United States v. KPMG LLP KPMG Information.
KPMG Statement of Facts.

2

3

4

Superseding Indictment, United States v. Stein, et aI., 05 Crim 888 (LAK) (SDNY).
Superseding Indictment Press Release.
Declaration of

5

6

Keith Tucker filed in John Doe 1 & John Doe 2 v.

United States, 398 F.3d 685 (5th Cir. 2005).
7

Letter from Shirah Neiman to David Gustafson, Acting Chief, Federal Claims Section requesting stay. Court of
Sidley Austin Brown & Wood response to IRS Summons.

8

9

Page entitled "Epsolon Limited" detailing options transactions.

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Page

Appendix (Continuation):
Declaration of David House
Exhibits

Description

10
11

Memorandum to Eugene Schorr, 1/18/2001.

Facsimile to Keith Tucker from Timothy Speiss dated 12/16/200,
KTTC0013

10.

12
13

Email from Speiss to Mox Tan, KTTC3217.
Email to RJ. Ruble KTTC2768.

14
15

Letter from Brown & Wood to Keith Tucker 12/26/2000, KTTC2755.
Email to Ruble Tucker letters, KTTC2772.

16 17
18

Email from Haber to Ruble re Tuckere Opinion, KTTC2773.

Memo from Tilevitz to Rublee re opinion to Sligo (200), KTTC2774.
Email from Mox Tan to R.J. Ruble re rep letters, KTTC3168.
Email from Ruble to Haber re Tucker, KTTC2780.

19

20
21

Email from Haber to Ruble re Tucker.
Fax from Hber Sodano/Ruble re Tucker, KTTC2781.
Fax from Haber to Ruble re timing of

22
23

Tucker tax opinion, KTTC2793.

Facsimile from Harber to Sodano/Ruble re Tucker letter, KTTC2980. Letter from Sidley Austin Brown & Wood re opinion letter, KTTC2759. Copy of deposition transcript to R.J. Ruble in Shasta v. United States.

24
25

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Page

TABLE OF AUTHORITIES
Cases:
Afro-Lecon, Inc. v. United States, 820 F.2d 1198 (Fed. Cir. 1987) . . . . . . . . . . . . . . 21-22
Ampetrol v. United States, 30 Fed. Cl. 320 (1994) .......................... 22, 24

Belford Strategic Investment Fund and Presidio Growth LLC v. United States,
Dkt No. C-04-4309 ................................................ 3
C3, Inc. v. United States, 4 Cl. Ct. 7901 (1984) ............................... 21

C3, Inc. v. United States, 5 Cl. Ct. 6591 (1984) ............................ 23-24

Campbell v. Eastland, 307 F.2d 478 (5th Cir. 1962), cert. denied, 371 U.S. 955 (1963) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-22
Crawford Property v. Commissioner, Docket No. 2052-01 ......................28

Diversifed Capital Services v. Commissioner, Docket Nos. 2053-01,
13330-01,13331-01 ...............................................28
Diversifed Group Inc., et at. v. Commissioner, Docket No. 2051-01 ..............28

Goddard v. Commissioner, Docket No. 1144-05 ..............................28

Goddardv. Commissioner, Docket

No. 1145-05 .............................28
No. 1143-05 .............................28

Greenburgv. Commissioner, Docket

John Doe 1 & John Doe 2 v. United States, 398 F.3d 686 (5th Cir. 2005) .......... 4-5

Landis v. North American Co., 299 U.S. 248 (1936). . . . . . . . . . . . . . . . . . . . . . . . . 22-23
Litton Systems, Inc. v. United States, 215 Ct. Cl. 1056 (1978) ....................22

Meruelo v. Commissioner, Docket No. 624-04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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Page

Cases (Continuation):
Penden v. United States, 512 F.2d 1099 (Ct. Cl. 1975) . . . . . . . . . . . . . . . . . . . . . . . . . .21
Pointe Du Hoc v. Commissioner, Docket No. 006041-05 . . . . . . . . . . . . . . . . . . . . . . . .28

Presidio Advisors, LLC, Norvest Ltd. v. United States, Fed. Cl. No. 05-411 . . . . . . . . . .2
Prestop Holdings v. United States, Fed. Cl. No. 05-576 T ........................ 2

Securities and Exchange Commission v. Dresser Industries, Inc., 628 F .2d
1368 (D.C. Cir.),cert. denied 449

U.S. 993 (1981) ..........................21

Starlike Properties v. Commissioner, Docket No. 2484-04 . . . . . . . . . . . . . . . . . . . . . . . 28
St. Paul Fire & Marine Ins. Co. v. United States, 24 Cl. Ct. 513 (1991) ......23,24,29

Keith A. & Laura B. Tucker v. Commissioner, Docket No. 12307-4. . . . . . . . . . . . .26,29

United States v. Stein, et at., 05 Crim. 888 (LAK) . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,29

Statutes:
Crimes and Criminal Procedures (18 U.S.C.):
§ 371 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Internal Revenue Service Code of 1986 (26 U.S.C.):
§ 165 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

§ 7201 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 § 7212 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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Page
Miscellaneous:
Fed.R.Civ.P 6(e) ....................................................... 26

Fed.R.Crim.P.6(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
IRS Notice 2000-44, (August 13, 2000) ...................................... 7

United States Court of

Federal Claims Rules:

R. 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
United States Tax Court Rules:

R. 70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
R.74 ........................................................... 27 R.75 ......................................................... 3,27
R.91 ......................................................... 3, 27

"The Role of Professional Firms in the us. Tax Shelter Industry, " the Committee on Permanent Subcommittee on Investigations of

Homeland Security and Governmental Affairs, at 11, Senate Report 109-54, 109th Cong., 1st Session (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS (Judge Margaret M. Sweeney)

No. 05-999 T
EPSOLON LIMITED, by and through SLIGO (2000) COMPANY, INC.,
Tax Matters Parner,

Plaintiff,
v.

THE UNITED STATES OF AMERICA,
Defendant.

BRIEF IN SUPPORT OF DEFENDANT'S MOTION TO SUSPEND PROCEEDINGS

This lawsuit is one of several dozen in this Cour, the district cours, and the Tax Court,
that involve the so-called "Son of

Boss" tax shelter. The United States has moved this Cour to

suspend proceedings because of a major criminal investigation that overlaps with this civil suit. Where discovery in a civil lawsuit threatens to interfere with a related criminal prosecution and

ongoing investigation, courts routinely stay the civil case, so the criminal matter may proceed
unimpeded. The United States Attorney for the Southern District of

New York is prosecuting an

ilegal tax shelter criminal conspiracy indictment which alleges that various advisors conspired
with their wealthy clients to fraudulently reduce or eliminate their taxes by making false and misleading statements in opinion letters and other transaction documents used to execute various
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fraudulent tax shelters. The type of shelter involved here (which was referred to by the alleged

conspirators as an "SOS") and its varants, and the specific Tucker/Epsolon transactions at issue
in this suit, are encompassed by the indictment. United States v. Stein, et ai., S05 Crim. 888

(LAK) (SDNY). Among the persons indicted in Stein is Raymond J. Ruble, also known as "RJ.
Ruble", the opinion letter writer and a potential witness in this case, as well as other KPMG
personnel involved in the review and marketing of SOS shelters. Also referenced in the

Indictment is the tax shelter boutique that was involved in the Tucker/Epsolon transactions. The

stay request is intended to prevent prejudice to the Governent's criminal case and ongoing
investigation. In addition, because of the pendency of

the Stein criminal trial, critical witnesses

in this case who have information about Keith Tucker and his motivations and considerations in
first considering, and ultimately participating in, the Epsolon tax shelter transaction, have already

and/or will likely assert their Fifth Amendment privilege and refuse to provide testimony
necessary for the Governent to fully and fairly defend this case.

To make their initial disclosures, to take discovery, and to prepare this case for trial, both

sides will necessarily have to address matters that directly implicate - and will likely interfere
with - prosecution of

the Stein criminal case and the ongoing criminal investigation..

Accordingly, the Court should stay all proceedings in this case until the criminal case is resolved.

In two other cases to which the criminal tax shelter case is related, this Court has granted

Motions to Stay fied by the United States on grounds similar to those presented below. Presidio
Advisors, LLC, Norvest Ltd. v. United States, Fed. Cl. No. 05-411 T; Prestop Holdings v. United

States, Fed. Cl. No. No. 05-576 T. The motion in Presidio Advisors was granted by this Court on

November 17,2005, and the motion filed in Prestop Holdings was granted on December 8, 2005.
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Similarly, in the case Belford Strategic Investment Fund and Presidio Growth LLC v. United

States, Dkt No. C-04-4309 VRW, (N.D. Cal.), the District Court entered an order on November
7,2005, staying that case pending the criminal proceeding in the Southern District of

New York.

Keith Tucker is the individual who, by means of

the Epsolon entity, utilized the tax

shelter at issue in this case in an effort to reduce his individual tax liabilities. He is also one of
the persons receiving the Notice of

Final Partnership Administrative Adjustment. Exhibit A to

plaintiffs Complaint. Mr. Tucker has fied a petition in Tax Court with respect to his individual
taxes involving the illegal tax shelter which relates to both this case and the criminal case
referenced above. Keith A. and Laura B. Tucker v. Commissioner, Docket No. 12307-04. The

Commissioner filed a Motion to Stay that proceeding. That motion was denied by Order dated
December 13,2005.1

INTRODUCTION
The individuals, entities, and transactions involved in this case are intimately related to a

broad-based conspiracy to develop, promote, sell, and implement varous illegal tax shelters by
the worldwide accounting firm KPMG LLP and others.2 On August 29, 2005, KPMG admitted

1While the Tax Court denied the Commissioner's Motion without explanation, it is
possible that the Tax Court considered that its rules do not permit the broad, far-reaching

Federal Claims. See, e.g. Rule the United States Tax Court (limiting the taking of depositions). Further, Tax the Rules of 75 of Court practice encourages the use of stipulations at triaL. Rule 91 of the Rules of the United States Tax Court. Thus, the Tax Court may have believed that proceeding with trial in that case would not have an impact on the criminal case. The Governent does not agree.
discovery encouraged in the Rules of the United States Court of

2 See "The Role of Professional Firms in the Us. Tax Shelter Industry, " Permanent
Subcommittee on Investigations of

the Committee on Homeland Security and Governental

Affairs, at II, Senate Report i 09-54, i 09th Cong., i 5t Session (2005) ("Subcommittee Report").
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and accepted responsibility for violations of law with respect to its involvement in developing,

promoting, selling, and implementing ilegal tax shelters during the period from 1996 through
2002 and has agreed to pay $456,000,000 to the United States as a punitive fine, restitution, and

penalties to the IRS stemming from its involvement with the illegal tax shelters.3 Among the
fraudulent tax shelter transactions designed, marketed, sold, and implemented by KPMG were
FLIP (Foreign Leveraged Investment Program), OPIS (Offshore Portfolio Investment Strategy),
BLIPS (Bond Linked Issue Premium Structure), and SOS (Short Option Strategy) shelters.4

BACKGROUND
Plaintiff

fied this action on September 15,2005, seeking a redetermination of

adjustments that the Internal Revenue Service proposed to the partnership income tax return

(Form 1065) that Epsolon Limited (Epsolon) fied for its taxable year ended December 31,2001.5
Plaintiff asks the Court to overturn the IRS's determinations in the Notice of

Final Parnership

Administrative Adjustment (FP AA). In the FP AA, the IRS determined that Epsolon had utilized

a tax shelter involving option positions in foreign currency to produce an arificial loss for the
year 2001 to be reflected on the partners' income tax returns in the amount of$13,890,954.

(Exhibit A to plaintiffs complaint.) The IRS determined, inter alia, that the transactions giving

David House (hereinafter, House Decl.), as Ex. I); KPMG Information (House Decl., Ex. 2); KPMG Statement
3 See KPMG Prosecution Agreement (attached to the Declaration of

of Facts (House DecL. Ex. 3.).

4 KPMG Information, ir 11 (House Decl., Ex. 2).

5This brief generally assumes arguendo that the events happened as plaintiff alleges.

Although reference is made in this Memorandum to the "partnership" and various purported entities, defendant does not concede that, under the applicable law, a viable parnership or the alleged entities existed.
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rise to the claimed loss were not entered into with a profit motive, lacked economic substance,

had no bona fide business purpose, and were shams. Par of the option transactions culminated
in a "paper" loss, generated as a result of parnership interests with an artificially pumped-up

basis. The United States expects to prove at trial that these losses were calculated to be used by
Tucker to avoid paying income taxes on substantial amounts of income.

Tucker commenced a legal proceeding against KPMG under the pseudonym "John Texas to enjoin KPMG
Doe 1" in the United States District Court for the Northern District of

from responding to an IRS summons as to Tucker and his transactions. See John Doe 1 and John
Tucker's
Doe 2 v. United States, 398 F.3d 686 (5th Cir. 2005). A true and correct copy of

Declaration submitted in that action is attached hereto as Ex. 6 to the Declaration of David
House,6 and is the basis for several of

the facts detailed below. Other documents were obtained

by the Commissioner through informal discovery in the Tax Court case, true and correct copies
of which are attached to the Declaration of

David R. House.

The KPMG Tax Shelter Transactions At Issue In This Case
In the Declaration of

Keith A. Tucker (House Decl., Ex. 6), Tucker stated that in

December 2000, Timothy Speiss, a partner in KPMG's "Inovative Strategies" group, advised
Tucker that KPMG could develop a solution to Tucker's 2000 tax planing needs. (Ex. 6, paras.

6,12.) Tucker stated that KPMG recommended he engage Brown & Wood "to provide a legal
opinion that would give me additional comfort in the face of an IRS challenge," and that Brown

& Wood provided him with such an opinion. (Ex. 6, para. 16.) Tucker further stated that based

6Although the declaration was originally submitted under seal, the Distrct Court unsealed

the document by Order entered April 12, 2004.
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on the tax and legal advice ofKPMG and Brown & Wood, he engaged KPMG to implement and

execute the transaction for him in December 2000. (Ex. 6, para. 17.)
The KPMG transaction produced a claimed Schedule E loss from foreign currency
options allegedly entered into by Tucker's Subchapter S corporation, Sligo (2000) Company, Inc., ("Sligo"), and Epsolon Limited ("Epsolon"), a foreign entity claimed to have been owned

and controlled by Sligo. The complaint alleges that, on December 20, 2000, Epsolon purchased
multiple foreign currency options from Lehman Brothers, N.A., for a premium of $156,041 ,001.
(CompL., para. 18a.l.) On the same date, Epsolon sold to Lehman multiple foreign currency

options for a premium of$157,500,000. (CompL., para. 18a.2.) The next day, Epsolon
supposedly sold those options it had acquired for a sale price of$50,531,399, and realized an
alleged gain of $51 ,260,455, which Epsolon contends was not taxable due to its status as a
foreign corporation not engaged in a United States trade or business. (Compl. paras. l8a.3-4.)

On December 21, 2000, Epsolon alleges, it used the proceeds to purchase additional foreign
currency

options. (CompL. para. 18a.5.) Epsolon then alleges that it elected to be classified a

partnership on December 27,2000, with the result that the shareholders became parners in the
Epsolon partnership with a basis in their partnership interests equal to the basis Epsolon had in

its assets prior to the partnership election. (Compl. para. i 8a.6.)
The complaint then alleges that Epsolon realized a $39,584,511 loss for 2000 as a result
of the foreign currency options disposed of

in 2000, and a further loss of$13,890,954 for 2001 as

a result of

foreign currency options transactions which took place on Januar 8,2001. (CompL.

para. 18a.7-8.)

The strategy detailed above is that of

the "SOS" variant of

the Son of

BOSS tax shelter, a

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transaction invalidated as an abusive tax shelter by IRS Notice 2000-44, released August 13,

2000, four months before the transactions were implemented in this case. According to the
complaint, the Tucker transactions were implemented and completed in less than one month's
time.

The KPMG Deferred Prosecution AereeIDeot
On August 26, 2005, KPMG and the United States entered into a Deferred Prosecution
Agreement. (House Decl. Ex. 1.) At page 3 of

the Deferred Prosecution Agreement, KPMG
Facts, it had:

admitted that as set forth in an incorporated Statement of

Assisted high net worth United States citizens to evade United States individual income taxes on billons of dollars of capital gain and ordinar income by developing, promoting and implementing unregistered and fraudulent tax shelters. A number ofKPMG tax parners engaged in conduct that was unlawful and fraudulent, including: (i) preparing false and fraudulent tax returns for shelter clients; (ii) drafting false and fraudulent proposed factual statements and the documentation underlying the shelters; (iii) issuing representations as par of opinions that contained those false and fraudulent statements and that purported to rely upon those representations, although the KPMG tax parners and the high net worth individual clients knew they were not true; (iv) actively taking steps to conceal from the IRS these shelters and the true facts regarding them; and (v) impeding the IRS by knowingly failing to locate and produce all documents called for by IRS summonses and misrepresenting to the IRS the nature and extent ofKPMG's role with respect to certain tax shelters.
In the section of the Statement of

Facts (House Decl., Ex. 3), entitled "The Fraudulent

Tax Shelter Activities," KPMG admitted at paragraph 5 that "KPMG tax parners helped design
or sell the following tax shelters (and variations of

them) to high net worth United States citizens

during the period in question." (Emphasis added.) Among the shelters so described was the
Short Options Strategy ("SOS") and its varations.

Paragraph 20 of the Statement of Facts recited that "SOS and variations on that shelter

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were designed to generate a substantial ordinary or capitalloss through the creation of an
artificially high basis in an interest in a partnership or other entity through a series of purchases
and sales of offsetting options on foreign currency."
Paragraph 28 of the Statement of

Facts recites that in early 2002, the IRS issued 25

summonses to KPMG calling for information relating to tax strategies in which KPMG was
involved. In paragraph 30 of the Statement of

Facts, KPMG admits that "KPMG tax parners

understood that documents relating to BLIPS and SOS were called for" in response to IRS

summonses, but that KPMG "did not produce any documents relating to SOS," and that "on
several occasions prior to early 2003, the IRS was falsely advised that KPMG had largely
complied with the IRS summonses."
In paragraph 32 of the Statement of

Facts, KPMG further admits that "in May 2003, IRS

agents directly asked KPMG, through its outside counsel, what role KPMG had played in the

SOS shelters," that a KPMG tax parner "falsely advised that the only role that KPMG had played
with respect to SOS was to assist a couple of

high net worth individual clients in preparng and

fiing tax returns that reflected the tax losses from SOS transactions," and that "(t)his false
representation was then relayed to the firm's counsel, and then made to the IRS." KPMG further
admits that "none of

the SOS transactions marketed and sold by KPMG tax partners were

provided to the IRS until late 2003 and early 2004."

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The AU2ust 29. 2005 Indictment
On August 29, 2005, an Indictment was unsealed in the Southern District of

New York,

charging seven former KPMG tax partners, one former KPMG tax manager, and Brown & Wood

attorney, Raymond J. Ruble, with criminal violations under 18 US.C. § 371 stemming from their
involvement in KMPG tax shelters, including the Short Options Strategy and its variants.

(House Decl., Ex. 4.) The indictment charged at paragraph 15 that:
During the period from at least in or about 1996 through at least in or about 2003,

the defendants JEFFREY STEIN, JOHN LANNG, RICHAR SMITH,
JEFFREY EISCHEID, PHILIP WIESNER, JOHN LARSON, ROBERT PFAFF, RAYMOND 1. RUBLE, also known as "RJ. Ruble," and MAR WATSON, and
others known and unkown to the Grand Jury (hereinafter their "co-conspirators")

participated in a scheme to defraud the IRS by devising, marketing, and implementing fraudulent tax shelters, by preparng and causing to be prepared, and filing and causing to be filed with the IRS false and fraudulent U.S. individual income tax returns containing the fraudulent tax shelter losses, and by fraudulently concealing from the IRS those shelters.
Paragraph 7 of

the indictment identified JEFFREY STEIN as a KPMG tax partner who,

in or about 2000, became Vice Chairman ofKPMG Tax Services.
Paragraph 10 of the indictment identified JEFFREY

EISCHEID as a KPMG tax partner

who, during the year 2000, was head ofKPMG's Inovative Strategies Group.
Paragraph 13 of the indictment identified RAYMOND 1. RUBLE, also known as"R .1.
Ruble," as a tax parner in the New York, New York offce of a prominent national

law firm.

Paragraph 18 of

the Indictment charged that "(a)mong the fraudulent tax shelter

transactions designed, marketed and implemented by the defendants. . . and their co-conspirators
were FLIP ("Foreign Leveraged Investment Program"), OPIS ("Offshore Portfolio Investment

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Strategy"), BLIPS ("Bond Linked Issue Premium Structure"), SOS ("Short Option Strategy") and

their variants." (Emphasis added.)
Paragraph 32 of

the indictment charged that "SOS and its variants were designed to

generate substantial capital and ordinar losses through a series of pre-aranged transactions that
involved the clients entering into virtually offsetting foreign curency options positions with a
bank,. . . transferrng the offsetting options positions to a parnership or other entity and then

withdrawing from the transaction, claiming a loss in the desired amount." Paragraph 32 further
stated that "for many of

these SOS-type transactions, KPMG did not issue an opinion letter, but

instead certain lawyers, including RUBLE, issued 'more likely than not' opinion letters with

respect to those transactions. The SOS opinion letters, and other associated documents, were
false and fraudulent in a number of ways well known to the defendants SMITH, EISCHEID and
RUBLE.. .."
As to Obstrction of

IRS investigations, the Indictment, relative to "SOS tax shelters,"

states that "SMITH and others caused KPMG falsely to claim to the IRS that the production of
documents and information relating to the summonses was substantially complete" (para. 40) and
that "EISCHEID intentionally caused KPMG's representatives to falsely respond that KPMG was

not involved in SOS, but may have prepared a couple of tax returns containing SOS losses."
(para. 41)

The October 17. 2005 Supersedin~ Indictment
On October 17,2005, a superseding indictment was unsealed in the Southern District of

New York. (House Decl., Ex. 5.) The superseding indictment charged at paragraph 25 that the
original nine defendants, as well as ten additional defendants:
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paricipated in a scheme to defraud the Internal Revenue Service by devising, marketing, and implementing fraudulent tax shelters, by preparing and causing to be prepared, and filing and causing to be fied with the IRS false and fraudulent U.S. individual income tax returns containing the fraudulent tax shelter losses, and by fraudulently concealing from the IRS those shelters.
The superseding indictment, at paragraph 28, repeats the charge from the August 29

indictment that among the fraudulent tax shelter transactions designed, marketed, and
implemented by the defendants (including Ruble) were FLIP, OPiS, BLIPS, and
"SOS ('Short Options Strategy') and their varants."

At paragraph 47, under the heading "The Fraudulent SOS Shelters," the superseding

indictment states that "these shelters were referred to by varous names, including Short Option
Strategy, Spread Option Strategy, SOS, Binary Option, Digital Option, Gain Mitigator, Loss
Generator, COINS, BEST, (and) FX Transaction (hereinafter 'SOS')."

Paragraph 47 further states that KPMG's Washington National Tax Offce "reviewed draft
'more likely than not' SOS opinion letters prepared by the defendant RAYMOND J. RUBLE, also

known as "RJ. Ruble," and other firms, and determined that the transactions described therein
were not more likely than not to withstand IRS challenge." Paragraph 47 of

the superseding

indictment further charges that "nevertheless, between 1998 and 2002, the defendants JEFFREY

STEIN, ... JEFFREY EISCHEID, ... and RAYMOND J. RUBLE... and their co-conspirators,
assisted in marketing and implementing SOS transactions for KPMG clients.. ,,"
Paragraph 32 of

the superseding indictment alleges that "SOS was marketed and sold

from at least in or about 1998 through at least in or about 2002 to at least 165 wealthy
individuals, and generated at least $l.9 bilion in phony tax losses...."

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Paragraph 78.e of

the indictment alleges that on or about December 15, 1997, Ruble

stated that Ruble's managing partner had approved his working with KPMG on a joint basis to

develop and market tax products and jointly to share in the fees. Paragraph 47 of the superseding indictment further alleges that for many SOS

transactions, "KPMG did not issue an opinion letter, but instead certain lawyers, including
RUBLE, issued 'more likely than not' opinion letters with respect to those transactions so that

clients would claim the fraudulent SOS losses and evade taxes." Paragraph 49 of the superseding
indictment further alleges that the SOS opinion letters were false and fraudulent in a number of
ways.
Paragraph 27 of

the superseding indictment charges that the conspirators issued such false

and fraudulent opinion letters "with the intent that the clients would claim the fraudulent tax shelter losses on tax returns and provide the opinion letter and other false and fraudulent transactional documents and/or the false and fraudulent representations and statements contained
therein to the IRS if and when the client was audited."

At paragraph 51, the superseding indictment alleges that many SOS transactions marketed by KPMG were arranged and implemented by an unnamed New York, New York, tax shelter
firm pseudonymously identified as "the Shelter Boutique."
Paragraphs 52 and 53 of

the superseding indictment allege that in addition to the fees

collected by the Ruble law firm for the issuance of opinion letters on SOS and other tax shelter transactions, Ruble accepted side payments from the Shelter Boutique relating to his participation

in devising, marketing, and implementing tax shelters. At paragraphs 81-83, the superseding

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indictment charges Ruble with the additional crime of

tax evasion under 26 US.C. § 7201 for

failing to report those side payments as income during the period 1998-200 I.

The superseding indictment, at paragraph 54, alleges that RUBLE, STEIN, EISCHEID

and the other named defendants, in addition to preparing false and fraudulent documentation relating to the shelter transactions, and preparing and causing to be prepared tax returns that
incorporated the phony tax shelter losses, also fraudulently concealed the transactions by, inter alia, not registering the shelters with the IRS as required by law and obstructing IRS and Senate
investigations into their tax shelter activities.

As to obstruction of the IRS, paragraph 60 of the superseding indictment states that IRS

summonses called for the production of documents relating to SOS tax shelters, and that

although KPMG personnel directing responses to those summonses were aware ofKPMG's
involvement in marketing and implementing SOS transactions, nevertheless, none of the SOS tax

shelters marketed or implemented by KPMG, or in which KPMG personnel paricipated, were
disclosed to the IRS. Paragraph 60 further alleges that various KPMG personnel falsely claimed

that the production of documents and information relating to the summonses was substantially
complete.

Paragraph 61 of the superseding indictment further alleges that when the IRS in May

2003, inquired about KPMG's failure to produce SOS information, JEFFREY EISCHEID and
another person caused KPMG's representatives to falsely respond that KPMG was not involved
in SOS. As a result, paragraph 85 of

the superseding indictment charges EISCHEID with

Attempts To Interfere With The Internal Revenue Laws under 26 U.S.C. § 7212.

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The Connections Between Petitioners' Transactions. The Criminal Defendants. And The
Criminal Prosecution

As set forth in a letter dated January 13, 2006 from Shirah Neiman (Chief

Counsel to the

United States Attorney for the Southern District of

New York) to David Gustafson, Acting Chief,

Court of

Federal Claims Section, Department of Justice (House Decl., Ex. 7), the Tucker tax

shelter transaction at issue in this civil case is a shelter which KPMG referred to as an SOS

shelter, and the specific Tucker/Epsolon transaction is encompassed within the charges in the

superseding indictment, including paragraphs 32, 47-51. The facts and issues relevant to both
this case and the criminal proceeding include, among others, KMPG's review and evaluation of
the SOS shelter and Ruble's opinion letter and its determination that neither would withstand an

IRS challenge; KPMG's decision nevertheless to market SOS shelters to taxpayers including the
Tuckers and to prepare tax returs encompassing purported SOS losses; KPMG's actual
marketing of the shelter to the Tuckers; Ruble's opinion letter and the veracity of

the

representations contained therein made by among others the taxpayers; and the role of the shelter

boutique, its principle owner and related parties in implementing the Tucker shelter. (House
Decl., Ex. 7.)

The fact that petitioners' transactions are among the SOS transactions described in the superseding indictment is also confirmed by the following:
The petitioners' description of the foreign currency options transactions of

Sligo and

Epsolon as set forth in the Complaint corresponds to the description of the SOS Shelters as set
forth at paragraph 47 of the superseding indictment.

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Paragraph 47 of the superseding indictment notes that the SOS shelters were referred to

by various names, including "Spread Option." On June 29, 2004, the IRS received a response to
a "John Doe" summons that had been served on Sidley Austin Brown & Wood (the successor
firm to Brown & Wood) relative to tax shelter transactions in which SABW hàd participated.

(House Decl., Ex. 8.) The response identified Keith Tucker as a participant in "DiversifiedSpread Options." Additional documents referenced below also refer to petitioners' transactions
as "options spreads."

Paragraph 47 of the superseding indictment also states that the SOS shelters were referred
to as "digital options." In response to informal discovery received by the governent in the Tax

Court case brought by Keith Tucker,7 the Tuckers provided the document entitled "Epsolon

Limited." (House Decl., Ex. 9). That document, at item 4), claims that on December 20,2000,
Epsolon entered into a series of "digital" options, which options correspond to those option

transactions alleged in plaintiffs complaint in this case.
The documents referred to below demonstrate that, at a minimum, three of the indicted

individuals, RJ. Ruble, Jeffrey Eischeid and Jeffrey Stein, had direct involvement in planing,
approving, executing, or providing legal opinions with respect to Keith Tucker's KPMG tax

shelter transactions. The documents also ilustrate the central role ofKPMG's Timothy Speiss in
developing, coordinating, and aranging Tucker's transactions. Speiss has stated in writing his
intention to claim the protection of the Fifth Amendment at any deposition or trial in the Tax the Exhibits referenced in the following discussion were supplied by petitioners in the Tax Court case in response to the Commissioner's informal discovery requests in that case and are attached to the Declaration of David R House, fied herewith. All documents referred to herein that were produced by petitioners in the Tax Court case are identified with a "KTTC" Bates number prefix.
7 Most of

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Court case, and wil, presumably, claim that protection at any deposition or

trial in this case as

welL. In his Declaration (House Decl., Ex. 6, pars. 12, 17), Mr. Tucker indicates that KPMG Tax

Partner Timothy Speiss advised him in December 2000 that KPMG could analyze and develop a
customized solution to his tax planing needs, and that based on tax and legal advice of

both

KPMG and Brown & Wood, he engaged KPMG to implement and execute that transaction.

In response to informal discovery in the Tax Court case, Keith Tucker provided the

Service with a copy ofa "Memorandum For Record re: Keith Tucker," dated January 18,2001,
prepared and signed by KPMG Tax Partner Eugene Schorr (House Decl., Ex. 10, KTTC 588-

591). Under the page 2 heading: "Background," Schorr states that
Mr. Tucker anticipated substantial income for the year 2000 resulting from the
increasing value of Waddell & Reed shares. Mr. Tucker eared substantial

income from the exercise of options in August of 2000. Accordingly, I asked Mr. Timothy Speiss, the northeast PIC ofInnovative Strategies, to meet with Mr. Tucker to discuss certain KPMG strategies to mitigate his year 2000 tax liabilities. Mr. Speiss met with Tucker to present varous KPMG strategies.
Under the page 2 heading: "KPMG Innovative Tax Solution For Mr. Tucker," Schorr
states that on or about December 14, 2000, Speiss advised him that he had discussed proposing a
tax solution for Mr. Tucker with the KPMG "tax leadership" (including, specifically, criminal defendants JEFFREY EISCHEID and JEFFREY STEIN), who agreed that Speiss could develop
such a solution for Mr. Tucker.
Schorr states in Ex. 10., p. 2, that "Tim (Speiss J conferred with Diversified and Brown &

Wood to develop a 'customized solution' for Mr. Tucker." Schorr relates at page 3 that:

Tim developed the tax and investment structure with Helios and Brown & Wood

Tim obtained KPMG approval for this "customized solution" for Mr. Tucker
Tim communicated the transaction to Mr. Tucker
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Tim orchestrated the transaction including engaging Frank Montgomery to provide the legal services necessary to complete the transaction Tim issued an engagement letter under my signature as engagement partner (I did not
sign the letter)

Tim coordinated the transaction for Mr. Tucker during Chrstmas week while Mr. Tucker was on vacation
Tim reviewed all investment decisions with Diversified
Tim arranged for the wire transfer of fees to KPMG
Speiss' central involvement in arranging the Tucker transactions, as related by Schorr, is

confirmed by a facsimile dated December 16, 2000, from Speiss to Tucker (House Decl., Ex.11),

in which Speiss discusses the pre-planing of the transactions, including the formation of the
required entities, the planing of the options transactions, the planned generation of

tax losses in

2000 and 2001 ("review point 4"), and "the ability to be exempted from penalty based upon
obtaining tax opinion reliance and investor due diligence" ("review point 24").
The early involvement of

Brown & Wood in Tucker's transactions was in the person of

criminal defendant RJ. Ruble. This is evidenced by a December 18, 2000, email (House Decl.
Ex. 12), from Speiss to several recipients regarding "Project Epsolon," wherein Speiss states:

"Finally, we were able to speak with R J. Ruble this evening and he answered our questions
WR T opinion matters."

As shown by an email string (House Decl., Ex. 13), on December 19, 2000, Speiss sent
an email to Jimmy Haber of

the Diversified Group, requesting that Haber forward Keith Tucker's

address to RJ. Ruble for purposes of

the "engagement letter." The email string indicates that

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Haber acted on that request by forwarding Tucker's name and address to Ruble on December 20,
2000.

A Brown & Wood letter to Tucker dated December 26,2000 (House Decl., Ex. 14),

recited that Tucker had asked the firm to act as special u.s. income tax counsel for him in
connection with "various digital

foreign currency option trades," (emphasis added). Ruble, in an
the Tucker letter. (House Decl., Ex. 15).

December 27,2000 email, acknowledges receipt of

RJ. Ruble was also deeply involved in drafting and providing opinion letters for Tucker

in connection with his options transactions. In a January 26,2001 email string under the heading
"(Redacted) and Tucker opinions," Ruble writes to James Haber of

the Diversified Group that "I

just got a call from Tim Speiss ofKPMG asking how these two opinions were progressing."
(House Decl., Ex. 16.) Haber's reply states that:

These opinions wil be two opinions. One is increase in outside basis by virtue of a 351 contribution of two options into an S Corp. and the second, a loss generated by the CFC
strategy. You do not have information on these opinions as yet. Orrn form opinion for the CFC par with the help of

just finished a

Bryan Cave. I am reviewing the opinion

and putting together the closing documents to send to you in the next day or two.
In a January 30, 2001 Memorandum from Orrn Tilevitz, Esq., of

the Diversified Group

to RJ. Ruble (House DecL., Ex. 17), Tilevitz wrote:

You will need to wrte opinions to Sligo (2000) Company, Inc., (Redacted), and
(Redacted). Each is an S Corporation that acquired a series of options through a

CFC (controlled foreign corporation). The CFC's trading activities resulted in gain recognized at the CFC level (but not passed through to the S corporation) and loss recognized at the S corporation leveL. Also, the shareholder of each corporation separately acquired an option spread through a single-member LLC and contributed the LLC interest to the S corporation in a section 351 transaction with the tax goal of increasing outside basis suffciently that a shareholder could deduct the S corporation's loss. Each shareholder wil also need an opinion on this issue (separate from the one issued to the S corporation). Jimmy will be
sending you, under separate cover, detailed descriptions of

these transactions.

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On March 14,2001, Mox Tan of

Helios Financial sent an email to RJ. Ruble that

attached draft letters containing taxpayer representations "for the basis step opinions for
(redacted), Tucker, and (redacted). (House Decl., Ex. 18.)
On March 16,2001, James Haber of

the Diversified Group sent Ruble an email asking if

the taxpayer representation letters for Tucker were "okay." (House Decl., Ex. 19.) By an email
of the same date, Ruble responded that "the rep lettere (sic) should

just repeat the reps in the

opinions." (House Decl, Ex. 20.)
By facsimile dated March 23,2001, James Haber of

the Diversified Group faxed to Susan

Sodano/RJ Ruble a draft taxpayer representation letter for Keith Tucker and requested "(p)er our
conversation, can you please substitute #14 of

the attached revised Rep. letter into the opinion."

(House Decl., Ex. 21.)
On April

10, 2001, Haber sent an email to Ruble inquiring about when the Tucker and

Hechler tax opinions would be completed. (House Decl., Ex. 22.)

On April 18,2001, James Haber sent Susan Sodano and R.1. Ruble a five-page facsimile
attaching proposed revisions to a legal opinion for Keith Tucker captioned "Re: Investment in

Foreign Entity." (House Decl., Ex. 23.)

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By letter dated June 28, 2001, (House Decl., Ex. 24), RJ. Ruble advised Keith Tucker
that:

Brown & Wood LLP previously issued to you a more-likely-than not opinion, dated December 31, 2000,8 ("Letter") regarding certain United States federal income tax consequences of investing in a foreign entity that acquires an option spread and other investment assets as described more fully therein ("Transactions").
We are unaware of

any change in law, or interpretation oflaw, that would adversely affect the United States federal income tax treatment of the the Letter and through March 26,2001 (the Transactions, since the date of date you fied your 2000 tax year individual income tax returns).
Very truly yours,
(SIGNED)
R.1. Ruble

Keith Tucker states at paragraph 26 of his Declaration, attached as Ex. 6 to the House

declaration, that "In April 2002, KPMG advised me that it had received summonses from the
IRS. KPMG advised me that the investment structure was not subject to disclosure to the IRS
pursuant to those summonses and that KPMG would not disclose to the IRS KPMG's tax advice
to me." Tucker further states at paragraph 27 of

his Declaration that "(i)n a telephone conference

on August 27,2003, Mr. Speiss, a tax parner at KPMG, advised me for the first time that KPMG

had changed its view and reached the conclusion that my name and the tax advice I received from

KPMG with respect to the investment structure planned for me by KPMG were responsive to an
IRS summons and, therefore, were going to be disclosed to the IRS."

8 Given the preceding facts, it is apparent that the tax opinion referenced in Ruble's
letter was backdated to December 31, 2000.

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ARGUMENT
The leading case in the Court of Appeals for the Federal Circuit on the issue of

whether

proceedings in a civil case should be suspended pending the resolution of a related criminal case
is Afro-Lecon, Inc. v. United States, 820 F.2d 1198 (Fed. Cir. 1987).9 As the Federal Circuit

stated, "(t)he Constitution does not require a stay of civil proceedings pending the outcome of

criminal proceedings. A court, however, has the discretion to stay civil proceedings, postpone
civil discovery, or impose protective orders and conditions 'when the interests of justice seem ( )

to require such action, sometimes at the request of the prosecution, . . . sometimes at the request
of the defense(.)"'!d. at 1202 (citations omitted). The Federal Circuit in

Afro-Lecon went on to

endorse the view taken by the D.C. Circuit in Securities and Exchange Commission v. Dresser

Industries, Inc., 628 F.2d 1368 (D.C. Cir.), cert. denied, 449 U.S. 993 (1981), that the court must
"make a case-by-case determination of

whether to grant a stay of civil proceedings." Afro-Lecon

at 1202 (citations omitted); C3, Inc. v. United States, 4 Cl. Ct. 790,791 (1984).

When related criminal and civil cases proceed simultaneously, there can be dangerous

implications for both parties. For a criminal defendant, allowing the civil case to proceed may
put his or her Fifth Amendment privilege against self-incrimination at risk, may expand the
discovery in the criminal case beyond the limits of the Federal Rules of

Criminal Procedure

(FRCP), and may expose the basis of the defense to the prosecution in advance of the criminal
triaL. Afro-Lecon at 1203, quoting Dresser at 1375-1376. The danger to the prosecution is that

9 The seminal case on this issue is Campbell v. Eastland, 307 F.2d 478 (5th Cir. 1962),
factors cert. denied, 371 U.S. 955 (1963), in which the court noted the significant number of which favor staying a civil case to allow a related criminal prosecution to run its course.

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the civil proceedings may act as "a dress rehearsal for a criminal trial, in which all the

Governent witnesses testify and are cross-examined at length, but the defendant to be does not,
(and it) is potentially a big lift to the criminal defense and could well be decisive in securing an
acquittal, if anything could." Afro-Lecon at 1203, quoting Penden v. United States, 512 F.2d

1099, 1104 (Ct. Cl. i 975). The criminal defendants may use the more liberal discovery available

in the civil case to gain knowledge regarding the Governent's criminal case to which they
would not otherwise have access. See, e.g. Litton Systems, Inc. v. United States, 215 Ct. Cl. 1056

(1978) (criminal defendant alleged to be using civil discovery to obtain evidence that would not
be available in the criminal proceedings).

The court in Penden stated that "(I)t has long been the practice to 'freeze' civil
proceedings when a criminal prosecution involving the same facts is warming up or under way
. . .. The 'freeze' we think is not for the protection of

the (criminal defendant) only, but also

rises out of a sense that deferrable civil proceedings constitute improper interference with the

criminal proceedings if they churn over the same evidentiar materiaL." Penden at 1103. In
making the decision to stay a civil case, courts must weigh the competing interests of the paries

and must maintain an even balance. Landis v. North American Co., 299 U.S. 248, 254 (1936)
(citations omitted); Ampetrol v. United States, 30 Fed. Cl. 320,321 (1994) (quoting Landis).
The Fifth Circuit in Campbell v. Eastland, 307 F.2d 478 (5th Cir. '1962), cert. denied, 371

U.S. 955 (1963), set forth the policy considerations supporting the deferral of civil discovery
pending the trial of a criminal proceeding as follows:

The very fact that there is a clear distinction between civil and criminal actions
requires a governent policy determination of priority: which case should be tried

first. Administrative policy gives priority to the public interest in law
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enforcement. This seems so necessar and wise that a trial judge should give

substantial weight to it in balancing the policy against the right of a civil litigant to his civil claims or liabilities. a reasonably prompt determination of

In St. Paul Fire & Marine Ins. Co. v. United States, 24 Cl. Ct. 513, 515 (1991), the
Claims Court enumerated three tests that a movant seeking a stay of a civil trial on the basis of a
concurrent criminal trial must satisfy:

(1) the movant must make a clear showing, by direct or indirect proof, that

the issues in the civil action are "related" as well as "substantially similar" to the
issues in the criminal investigation;

(2) the movant must make a clear showing of hardship or inequity if
required to go forward with the civil case while the criminal investigation is pending; and
the requested stay is not
(3) the movant must establish that the duration of

immoderate or unreasonable.

This three-part test was used most recently by the court in Ampetrol, which granted a stay

despite the fact that Ampetrol was not a defendant in the criminal proceedings. Ampetrol, 30
Fed. Cl. 320 at 321.

The court in C3, Inc. v. United States, 5 Cl. Ct. 659, 661 (1984), stated that "the

resolution ofIssue #1 requires no extensive comparative factual analysis by this court in order to
conclude that the issues in the civil action are 'related' as well as 'substantially similar' to those

in the criminal investigation." In fact, "defendant may satisfy its burden to make a prima facie
showing of

the ultimate fact, circumstantially." St. Paul Fire, 24 Cl. Ct. at 516.
Entitlement to a stay also requires the movant to "make out a clear case of hardship or
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inequity in being required to go forward. . ." Landis at 255. See also C3 at 792. In Ampetrol, the
court found that the mere fact of deposition discovery in the civil case would be a suffcient

hardship on the prosecution in the criminal case. In paricular, the court found that "(i)t would be
impossible to limit the educational effect of a deposition on a witness, or the impact that the mere
designation of discovery here might have in affecting strategy in the criminal proceeding."
Ampetrol, 30 Fed. Cl. at 322.

In St. Paul Fire, the court allowed a stay of six to nine months to allow for the completion
of the criminal investigation and/or grand jury proceedings and, if an indictment was issued,

through the period of triaL. St. Paul Fire at 517. In Ampetrol, the cour allowed a stay of at least
6 months, pending completion of

the related criminal triaL. Ampetrol at 322.

Defendant's motion to suspend the present action satisfies the St. Paul Fire three-part

test. First, based on the Subcommittee Report, the KPMG deferred prosecution documents, and
the superseding indictment, it is clear that the transactions engaged in by the Tucker entitiesEpsolon and SLIGO - were par of

the KPMG illegal tax shelter conspiracy. KPMG developed,

sold, and implemented the transactions for Tucker. The facts surrounding the shelter involved in this case are inseparably intertwined with the individuals (indicted and unindicted), entities, and
facts that will be the subject to the criminal triaL.

Among the areas of inquiry in this matter are whether Tucker entered this transaction with
a profit motive as required by § 165(c); whether the transaction lacked economic substance;
whether it had no bona fide business purpose; and whether the transaction was a sham. From the

facts described above, it is apparent that RJ. Ruble, an indicted person, was involved in the
Tucker transaction at least from December 18, 2000 through June 28,2001, that he conferred

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with KPMG in the development of

the shelter, arranged for Brown & Wood's representation, and

was centrally involved in the preparation of the Tax Opinion. Tucker himself acknowledges in
his Declaration that KPMG, and individuals connected with that firm, provided him with his tax

planning. Among the individuals referred to by Tucker is Timothy Speiss, a parner in KPMG's

"Inovative Strategies" group, which was described in the indictment (House Decl., Ex. 5, para.
2) as "focused on designing, marketing, and implementing tax shelters for individual clients."
Depositions of

Ruble, Speiss, and the other individuals connected with KPMG will be crucial in

establishing Tucker's motives for entering into the shelter transactions. The facts in this case are
10
more than suffciently related to the criminal case to warrant a suspension of proceedings here.

With respect to the second par of

the test, to allow discovery to proceed in this case now

wil create clear hardship and inequity. If discovery is allowed to go forward in this case,
including the initial disclosures required by RCFC 26(a)(I), it could interfere with the criminal
case and ongoing investigation in New York by allowing the criminal defendants in that case to
gain a preview of

the criminal case against them. Specifically, they would be able to obtain

testimony of

potential Governent witnesses in the criminal case through depositions in this

case. On the other hand, it is likely that indicted persons, and witnesses stil under criminal
investigation who may have knowledge about the facts of this case, would invoke their Fifth

Amendment rights if depositions are taken in this case before the criminal case is resolved

10 The facts relied upon to support this motion are taken from public information,

information obtained in the Tax Court proceeding, and the letter from the New York United the Court is unable to determine whether the facts in this case and States Attorney's Offce. If the criminal case are suffciently related based on that public information, defendant requests that it be given an opportunity to submit a sealed affdavit from the New York United States Attorney's Offce to establish the factual relationship between this case and the criminal case.
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because of the overlapping factual matters. In fact, R. J. Ruble has already claimed the
protection of the Fifth amendment in a deposition seeking to discover facts about a transaction

which is related to the criminal case and it is clear that Speiss and other individuals wil do the
same. A true and correct copy of

the deposition transcript ofR.J. Ruble is attached to the

Declaration of

David House as exhibit 25.

In addition, proceeding with the initial disclosures and other discovery at this juncture

would impair the case development by the Tax Division attorney assigned to defend this case

because he lacks access to information curently protected from disclosure by FRCP 6( e). It is
possible that cooperating witnesses exist in the criminal matter which cannot be disclosed to the

trial attorney defending this case pending resolution of the criminal case. Waiting until the
criminal case and ongoing investigation are resolved would enable the Tax Division attorney to
obtain access to information developed by the grand jury, either by showing a particularized need

suffcient to obtain an order of disclosure under Fed.R.Crim.P. 6(e), or by obtaining access to
1i information which may be made public after the prosecution of the criminal case is complete.

Discovery at this time would also undermine defendant's effective examination of

witnesses

because its attorney in this case does not have access to grand jury materials that could be critical

to effective and complete examinations. Thus, it is clear that there would be hardship, inequity,
and prejudice to both the criminal case and this case if

the proceedings in this case are not stayed

while the criminal case goes forward.
The fact that the Tax Court has denied a Motion to Stay in Tucker v. Commissioner,

11 Additionally, if a conviction is obtained in the criminal case, it may lead to a more

efficient resolution in this case.
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Docket No. 12307-04, without explanation, should not operate to prevent a stay in this case. The
United States does not agree with that deniaL. It is possible that the nature of

Tax Court

proceedings may have been a consideration. Proceedings in the Tax Court do not have the broad
discovery permitted in this Court. Rule 75 of the Rules of

the United States Tax Court severely
12

limits the taking of depositions without an Order of the Court or upon consent of the parties.

Further Rule 91 of

the Rules of

the United States Tax Court requires the paries to attempt to

13 Thus
agree upon stipulations of fact which can prevent the need for testimony at triaL.

12Tax Court Rule 75 provides in pertinent part:

trial has been issued or the Court, and after a case has been assigned to a Judge or Special Trial Judge of within the time for completion of discovery under Rule 70(a)(2), any pary may, without leave of Court, take a deposition for discovery purposes of a nonparty this Rule. . . . witness in the circumstances described in paragraph (b) of
(a) When Depositions May Be Taken. After a notice of

(b) Availabilty. The taking of a deposition of a nonparty witness under this Rule

is an extraordinar method of discovery and may be used only where a nonpary witness can give testimony or possesses documents or things which are Rule 70(b) and where such testimony, discoverable within the meaning of documents, or things practicably cannot be obtained through informal consultation the or communication (Rule 70(a)(I)) or by a deposition taken with consent of parties (Rule 74). If such requirements are satisfied, then a deposition may be
taken under this Rule, for example, where a party is a member of a parnership

and an issue in the case involves an adjustment with respect to such partnership, or a party is a shareholder of an electing small business corporation. . . .

(d) Objections. Within 15 days after service of the notice of deposition, a party or objections a nonparty witness shall serve on the party seeking the deposition any
to the deposition. The burden shall be upon the party seeking the deposition to the move for an order with respect to any such objections or any failure of nonparty witness, and such party shall annex to any such motion the notice of deposition with proof of service thereof, together with a copy of any responses
and objections. . . . .

\3Tax Court Rule 91 provides in pertinent part:

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proceedings in the Tax Court present different considerations with respect to a stay.

Moreover, other Tax Court Judges have in fact granted stays or continuances or have

removed cases from the calendar because of the pendency of the ongoing criminal tax shelter

investigation. See e.g., Crawford Property v. Commissioner, Docket No. 2052-01; Diversifed
Group Inc., et al. v. Commissioner, Docket No. 2051-01); Diversifed Capital Services v.
Commissioner, Docket Nos. 2053-01, 13330-01, 13331-01; Meruelo v. Commissioner, Docket
No. 624-04; Starlike Properties v. Commissioner, Docket No. 2484-04; Goddard v.

Commissioner, Docket No. 1144-05; Goddard v. Commissioner, Docket No. 1145-05;
Greenburg v. Commissioner, Docket No. 1143-05; Pointe Du Hoc v. Commissioner, Docket No.

006041-05.

Without a stay in this case, the United States wil be forced to make a "Hobson's choice"
where it must decide either to protect the criminal case by not making important evidence
available to its attorneys and the Court in this civil case, or protect the civil case by prematurely exposing the evidence to be used in the criminal triaL. No matter what choice it makes, one or
both of

the Governent's cases will be unfairly prejudiced.
If

the Governent chooses to protect the criminal case, both its civil case and its criminal

case wil be unfairly prejudiced because the Governent's civil attorneys wil be forced to take

a) Stipulations Required. (1) General. The paries are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, whether such matters involve fact or opinion or the application of regardless of law to fact. Included in matters required to be stipulated are all facts, all documents and papers or contents or aspects thereof, and all evidence which fairly should not be in dispute . . . .
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and defend civil depositions - to the extent individuals wil not invoke the Fifth Amendmentwhile they lack information that the prosecutors are temporarly unable to share with them about

documents, facts, witnesses and the criminal defendants. Moreover, to the extent the civil
attorneys for the Governent have gathered information and documents, using that information

and those documents to cross-examine witnesses wil potentially preview cross-examination by
the prosecutors in the criminal case and thereby enable those witnesses to tailor their testimony

by either side at the criminal triaL. A Governent choice to protect the civil case would come at
great cost to the criminal trial and pending investigations. The fact that the Tax Court's denial of
the stay in Tucker is forcing such a choice on the governent in that case should not force a

similar choice to be made in this case.14

Finally, because the trial in the criminal case is scheduled for September 11, 2006,

suspending proceedings in this case until after the criminal proceedings are resolved is not an

unreasonable delay in the proceedings in this case. Therefore the third part of the St. Paul Fire
three-part test is satisfied.

CONCLUSION
The Tucker/Epsolon transactions are part of the Stein indictment and the issue of the
legitimacy of

the Tucker's transaction will be litigated in the criminal triaL. To permit the civil

case to go forward with discovery and lor trial prior to the conclusion of

the Stein trial would

prejudice the criminal trial, and would prejudice the ability of the United States to fairly develop

their defense in the civil case pending before this Court. As the Senate Subcommittee Report,

14As of the drafting of

this memorandum, the United States is considering what options it
the stay in that case.

may have with respect to, the Tax Court's denial of

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the KPMG deferred prosecution documents, and the superseding indictment demonstrate, the

KPMG illegal tax shelter conspiracy generated bilions of dollars in phony tax losses and
involved a large number of individuals, many of whom are professionals, including lawyers and

accountants. The illegal tax shelter criminal proceedings are enormously important with respect
to the effective administration of the Internal Revenue laws, and this case is just one facet of the

overall conspiracy. Thus, as a result of grand jury secrecy, Fif