milstein criminal justice policy forum: mass marketing of abusive tax shelters

8/9/2019 Milstein Criminal Justice Policy Forum: Mass Marketing of Abusive Tax Shelters

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MILSTE

INC

RIMIN

ALJU

STICE

POL

ICY

FORUM

Remarks by Senator Carl LevinIntroduction by Howard P. Milstein

November 10, 2003

MASSMARKETING OF

ABUSIVE

TAX SHELTERS

Citizens Crime CommissionOF NEW YORK CITY, INC.


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THE MILSTEIN

CRIMINAL JUSTICE

POLICY FORUM

Si nc e 2 00 2, t he Ci tiz ens

Crime Commission of New

Yo r k C i t y h a s p re s e nt e d

a series of Criminal Justice

Policy lectures sponsored by

Edward L. and Howard P.

Milstein through the Milstein

Brothers Foundation. Each

event features a nationally

p ro m in en t s pe a ke r w ho a dd re s se s t he C o mm i ss io n

on such issues as crime, criminal just ice or terrorism.

The formal remarks are fol lowed by a question-and-

answer period. Each meeting is open to the media.

Attendance is l imited to 150 invited guests drawn

from the top ranks of the New York City business and

law enforcement communities. Each lecture is printed

and distributed to top business, civic and law enforce-

ment leaders.

The Cit izens Crime Commission of New York City

is an independent, non-profit organization working to

reduce crime and improve the criminal just ice system

in New York City. The Commission is supported by the

business community; its board of directors is drawn from

top corporate executives and members of major law

firms. The Commission was established in 1978.

Howard and Edward Milstein are prominent New York

bankers and real estate owners. They have a long record

of working with the New York City criminal justice system

to create and support innovative programs. They are also

active in national crime prevention issues.

HOWARD P. MILSTEIN


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Introduction by

Howard P. Milstein

Thank you, Tom. Once again, youve brought together a stellar group ofleaders to meet with an exceptional

criminal justice policy maker. Todays speaker,Senator Carl Levin, is known as a lawmakerwho puts principle before politics. And he sureknows how to get to the bottom of things -whether it's tracing the web of deceptionthat led to the collapse of Enron, the manip-

ulation of gas prices in the US, or moneylaundering schemes that have tainted partsof our economy.

Senator Levin has been a leader in toughinvestigations of the white collar crime that

can have such subversive and far-reachingeffects. As an advocate of public/private part-nerships, he understands the limits of govern-ment and the essential role the private sectormust play in improving our communities and

our society.

Senator Levin was elected to the UnitedStates Senate in 1978. Prior to that, he practicedlaw in his home state of Michigan. He servedas Assistant Attorney General of that state and

later as president of the Detroit City Council.

Senator Levin is currently the rankingminority member of the Senate ArmedServices Committee, where he has earned areputation as a strong supporter of our nation-al defense and an effective waste fighter. InJanuary 2003, the Secretary of the Navy citedSenator Levin for "exceptional service to theNavy and the Marine Corps," and presentedhim with its Distinguished Public Service

Award the highest award given to someonenot a member of the Navy.

Senator Levin also serves as the rank-ing minority member of the permanentSub-Committee on Investigations of the

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Government Affairs Committee. In 2002, aschairman of that sub-committee, Senator Levin

led Congress's most in-depth examination ofthe collapse of Enron. Senator Levin is also amember of the Small Business Committee andthe Senate Select Committee on Intelligence.

Senator Levin is the author of the

Competition and Contracting Act, which ledto significant reductions in federal procurementcosts. His Whistler Blower Protection Act pro-tects federal employees who expose wastefulpractices. He also helped alter the Taxpayers' Bill

of Rights, which protects individuals andsmall businesses from IRS harassment.

Newspapers in his home state havedescribed him as "a thoughtful, probing lawmaker," and, "the Senate's wise counsel on the

nation's most precipitous issues."

Aside from all Senator Levins publicaccomplishments that he has achieved sincehe first started out on the Detroit City Councilin 1969, there are a few sides to him thatparticularly endear him to people like us.

Although he is magnificently qualified to be the President of the United States, he isone of the few members of the United States

Senate who does not spend his waking hourstelling everyone that he should be President.

Pictured left, Howard P. Milstein andright, Senator Carl Levin

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Instead, he simply undertakes the businessof the nation and performs his job as our

leading military expert in the Senate withtotal competence and collegiality.

He has a great sense of humor and henever takes himself too seriously. Come tothink of it, Carl, maybe you should run forthe Presidency. In a time of such rank parti-sanship on both sides of the aisle, with mem-bers of Congress almost coming to blows overtheir differences, Senator Levin is from theold school of politics. He works closely with

his Republican colleagues and treats themwith respect.

Senator Levin maintains his dignity inthe midst of the most rancorous debates ofour time. One has only to observe his rela-tionship with Senator John Warner, the cur-rent chair of the Armed Services Committee,to understand one of the most important rea-sons for his effectiveness in the Senate whether the Democrats are in or out of

power. I wish that more Senators went to thatsame old school.

Maybe one of the reasons for his well-documented humility has to do with beingthe kid brother of another high achiever andwonderful public servant. Some of youmight not be aware that there are twoextraordinary Levins in public life. Each ofthem with a list of accomplishments thatwould satisfy the most determined Jewish

mother in America.

Sandy Levin is a respected member of theHouse Ways and Means Committee and hasserved in Congress for more than 20 years.

Without diminishing GW and Jeb, Carl andSandy may be the greatest one-two familypunch in public life today.

It's my pleasure to introduce SenatorCarl Levin.

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Remarks by

Senator Carl Levin

Thank you for inviting me here today toaddress this distinguished gathering.You are a unique mix of law enforce-

ment officials and concerned citizens, leadersin our legal and business communities andpublic life. Your tradition of coming togetherin this forum to put a spotlight on the criticalissues facing the law enforcement communityis truly a worthy public service.

There are a lot of financial scandals todaythat pollute the business climate. Accountingfraud. Mutual fund misconduct. Price manip-ulation in energy markets. Phony corporateoffices opened in offshore tax havens to avoid

paying taxes while the corporation continuesto use American services. But I'd like to talktoday about a serious scandal that hasn'treceived the attention it deserves, largely

because it is so complicated - namely, the

design and mass marketing of so-called "abu-sive" tax shelters.

Unlike legitimate tax shelters, abusive taxshelters are very complicated transactionspromoted to provide large tax benefits

unintended by the tax code. Abusive taxshelters are marked by one characteristic:there is no real economic or business rationaleother than a tax deduction. As Judge LearnedHand put it in Gregory v. Helvering, theyare "entered upon for no other motive but toescape taxation."

Crimes like terrorism, murder, fraud andembezzlement produce instant recognition ofthe immorality involved. Abusive tax shelters

are MEGOs - that means "My Eyes GlazeOver." Those who cook up these concoctionscount on their complexity to escape scrutinyand public ire. And the anti-tax climate con-tributes to the lack of public anger. If tax isspelled B-A-D in right-wing dictionaries, how

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can concocting tax shelter schemes to avoidpaying taxes be bad?

But complicated or not, MEGOs or not,the fact is that the mass marketing of abusivetax shelters by respected accounting firms,law firms, banks, and investment adviserswho are hawking these so-called "tax prod-

ucts" to thousands of people like late-night,cut-rate TV bargains, is surely scandalous,

just as Enron was scandalous.

And it is massive. It involves tens ofbillions of dollars each year. It goes on across

the country and around the clock. It under-mines the fabric of American society bydepriving our government of funds neededto strengthen homeland security, supportour troops, care for the sick, educate kids,

and more. It is corrupting some of our mosttalented professionals in law, accountingand finance. And it leaves honest taxpayersto make up the difference.

Last year, the Permanent Subcommittee on

Investigations, of which I'm now the rankingDemocrat, opened an in-depth investigationinto the development and marketing ofabusive tax shelters by professional firms likeaccounting firms, banks, investment advisors,

and law firms. I was then the Subcommitteechairman and initiated this effort due to ourEnron investigation which, among othermisconduct, disclosed that company's use ofelaborate tax dodges.

In December 2002, the Subcommittee helda hearing which examined an abusive taxshelter known as Slapshot, which J.P. MorganChase had designed and sold to Enron for $5million. Enron had calculated Slapshot would

produce tax benefits exceeding $120 million.As detailed in a Subcommittee report, this taxshelter relied primarily on a sham $1 billionloan that was arranged and financed by J.P.Morgan Chase, and concealed within a mind-

boggling array of loans, stock swaps, and

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structured finance transactions, many ofwhich occurred within minutes of each other.

The shelter's complexity was designed in partto prevent tax authorities from finding outwhat really happened.

We pierced the Slapshot veil only by sub-poenaing hundreds of boxes of documents;reading thousands of emails, conductingnumerous interviews, and spending monthsunraveling how that tax shelter worked.

We figured out Slapshot. But it took a

huge effort. The larger issue, which wehave spent the last year investigating withthe full support of our new SubcommitteeChairman, Senator Norm Coleman, is howrespected U.S. professional firms act like

schlock-houses, hawking shoddy, abusivetax shelters and enlisting the help of otherprofessionals in the marketing effort.

Our investigation found what could becalled a target-rich environment - numerousaccounting firms, investment advisors,

banks, and law firms developing the internaland external infrastructure necessary toaggressively design, market, and implementhundreds of complex tax shelters that people

would otherwise be unable, unlikely, orunwilling to employ. These products are sodubious that some of their developers evenhad clients take out insurance policies in casethe IRS caught up with them! And they are

doing it in exchange for hundreds of millionsof dollars in fees and other compensation,some of it contingent, while robbing the U.S.Treasury of billions of dollars in revenueseach year.

The Government Accounting Officereports that an IRS database tracking unre-solved, abusive tax shelter cases over a num-

ber of years estimates potential tax losses of$85 billion. The GAO also reports that the IRS

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has identified almost 300 firms that appear tohave promoted abusive tax shelters and other

abusive tax products.

The scrutiny of abusive tax shelters hasbeen mainly on the taxpayers using the shel-ters. If we are going to rid our tax system ofthis abusive infestation, we must extend that

scrutiny beyond the taxpayers to the highlyskilled professionals who design and marketthese schemes.

Many abusive shelters, for example, utilize

layers of corporations, trusts, and specialpurpose entities that only a trained financialprofessional could devise and establish.Others rely on intricate financial transactionsinvolving derivatives, warrants, and littleknown financial instruments that only asophisticated investment professional couldarrange. Still others utilize deceptive, multi-million-dollar loans that only our largestfinancial institutions could finance. And mostrely on complex and novel interpretations of

tax law, complete with obscure tax code ref-erences and convoluted tax opinions, thatonly a determined tax lawyer could construct.

Our investigation found that the profes-sionals marketing highly questionable taxshelters were trading on their reputations asrespected names in American business. Partof their sales pitch has been to assure poten-tial clients that they can use complex financialtransactions which those clients barely

understand to reduce or eliminate their tax bills, and then rely on the firm's expertise,vast resources, and reputation to fend off IRSscrutiny and penalties.

Another thing we learned is that thecharacter of the professional tax shelterindustry has changed fundamentally. Itused to be that individuals and corporationswent to an accounting firm or lawyer to askhow to structure their business affairs to

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minimize taxes. In response, their tax advi-sors would provide legitimate tax planning,

or in some cases, abusive tax shelters. Thistax advice was sought and provided on aone-to-one basis.

That's not the heart of the professional taxshelter industry today. Our investigation

found that it was not individuals and corpora-tions visiting their tax advisors, but a horde oftax advisors cooking up one complex schemeafter another, packaging them up as generic"tax products" with boiler-plate legal and tax

opinions, and then devising and undertakingelaborate marketing schemes to peddle theseproducts to literally thousands of personsacross the country.

Some of the professionals peddling thesetax dodges have the audacity to claim thatthey are not tax shelter promoters. If theyadmitted that they do what they so blatantly

but secretively do, they would be subject toIRS regulations requiring tax shelter promot-

ers to disclose their activities. Listen to thisemail from a senior tax professional to his staffwho just finished designing a tax shelter in acompany that denies it promotes tax shelters:

"I want to personally thank everyone fortheir efforts during the approval process ofthis strategy. It was completed very quicklyand everyone demonstrated true teamwork.

Thank you! Now let's SELL, SELL, SELL!!"

That's the tax shelter industry of today,aggressively mass marketing its self-named"tax products". We have uncovered disturbingevidence of tax professionals convincingclients to buy complicated tax schemes result-ing in hefty profits for the so-called profession-als. In too many cases, the firm pushing thetax product advised its staff of tax profes-sionals - I'm talking about CPAs and lawyers -to use high-pressure sales tactics to close the

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sales. Some firms are even using telemarket-ing. For example, one firm that now claims

its tax products were specialized and avail-able only for limited distribution, made coldcalls to thousands of people across the coun-try to market one particular shelter. The firmset sales goals for its employees and offered

rewards for those who met these goals.These are the tactics you might expect of a boiler room operation selling phony landdeals, but here they are coming from peoplein our top professions.

Some people are trying to claim that theworst tax shelter abuses are already over, sothere is no need for investigations, reforms, orstronger laws. But that's not what our investi-gation found. What we found is that, while a

few promoters are calling it quits, the tax shel-ter industry as a whole is still going strong,targeting new opportunities and market seg-ments, intensifying the pressure on lawyersand accountants to become tax shelter huck-

sters, continuing to cheat the treasury and, inthe process, victimizing tax professionalswho don't hawk these abusive tax products

but have to compete against those who do.

Next week in Washington, the Senate'sPermanent Subcommittee on Investigationswill hold two days of hearings that will peel

back the curtain and provide an inside look,with detailed case histories, at how respected

accounting firms, banks, securities firms andlawyers develop, market, and implementabusive tax shelters. We plan to present evi-dence on the corporate culture and the per-sonal attitudes involved, and what happenswhen someone doesn't want to go along withapproving or peddling, such tax shelters. Wewill also show the extensive, indeed highlyaggressive, marketing operations behind themodern tax shelter industry and the push tosell, sell; sell.

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We are determined to do everything wecan to expose, condemn, and stop the unethi-

cal and illegal conduct involved in the ped-dling of abusive tax shelters. Here are someactions we need to take:

First, we need to tighten the law on what isknown as the "economic substance" test.

This test involves examining whether,from an objective standpoint, the trans-action had a business purpose and wasintended to produce economic benefitsaside from a tax deduction. This test is

the primary anti-abuse tool that tax offi-cials use to penetrate bogus transactions.The Senate has twice passed provisionsoffered by Senators Grassley and Baucusthat would codify and strengthen this

judicial doctrine to provide the IRS astronger set of tools to set aside transac-tions whose only real purpose is taxavoidance, but these provisions have notyet been enacted into law.

Second, we need to increase the penalties onthose who produce and peddle illegal taxshelters. The current penalties are a joke.$1,000 for promoting an illegal tax shel-ter, $1,000 for aiding and abetting anoth-er person's tax evasion. These are thepenalties on a firm selling a tax sheltergenerating fees totaling hundreds ofthousands or even millions of dollars. Inone email we reviewed, a senior tax pro-fessional advised his firm not to worry

about failure to comply with the shelterdisclosure requirements, because thepenalties for noncompliance with theregistration requirement were so low.This so-called professional concluded

that an average deal resulting in fees of$360,000 had a maximum penalty expo-sure of only $31,000. That's some deal - ifyou get caught stealing, you only have togive back 10% of what you stole! It's nothard to see where the incentive is.

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Third, we need to get rid of the conflictsof interest that are so rife in this area.

Last month I introduced S. 1767, withthe co-sponsorship of Senator McCainand Senator Baucus, to end the conflictsof interest that now arise when anaccounting firm sells a tax shelter toan audit client and then audits thatclient's financial statements - in effectauditing its own work. Our proposedAuditor Independence and Tax SheltersAct would bar an accounting firmfrom auditing the books of a publicly

traded company to which it has solda tax shelter.

Fourth , we need to increase enforcementdollars for the IRS so they can go after

these abuses. Every dollar invested intax enforcement returns many timesover to the Treasury.

Finally , the key regulators - the IRS, thePublic Company Accounting Oversight

Board, the SEC, and the bank regulators -need to get together and brainstormabout how they can use their existingauthority to put a damper on the massmarketing of illegal or abusive tax shel-

ters. New regulations are needed, such asprohibiting contingency fees, and doingso on a nation- wide basis, as over 20states now do.

Regulation, of course, is but part of the

answer, and it is not the ideal answer. We needto restore professional pride. Professionalismshould mean high standards, codes ofconduct, avoidance of conflict of interest,and a sense of fiduciary duty. Justice Louis

Brandeis, in speaking at Brown University'sCommencement in 1912, spoke about how aprofession differed from other occupations:

"A profession is an occupation in whichthe amount of financial return is not the

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accepted measure of success." He continued:"[Recognized professions] select as their

test, excellence of performance in the broadest sense-and include, among otherthings, advance in the particular occu-pation and service to the community...In them a large income is the ordinaryincident of success; but he who exagger-ates the value of the incident is apt to failof real success."

We also need our professionals to offertheir services to our communities by showing

leadership on the role of taxes in supportingour civilization. I'm afraid the opposite mes-sage was transmitted by former PresidentReagan when he said in his State of the UnionAddress in 1985 that "Every dollar the FederalGovernment does not take from us...will makeour economy stronger, our lives more abun-dant, our future more free."

Some tax dollars are wasted, Lord knows, but not most. Taxes are a price of progress,

freedom and security. Some extreme anti-tax activists would have us celebrate TaxFreedom Day, the day of the year when alldollars we earn are kept and no more goesfor taxes. This day should also be recognized

by more responsible people as the End ofGovernment Services Day. A Day withoutclean air or homeland security. A Day whenwe do not have the protection of our police orfirefighters or our air traffic controllers. A Daywhen food is no longer inspected or our bor-

ders guarded.

But I'm not sanguine about this. Until all ofus share Franklin D. Roosevelt's belief that"Taxes, after all, are dues that we pay for the

privileges of membership in an organizedsociety," there will be the hucksters and thehustlers who peddle tax havens and taxshelters. For them we'll need tough penaltiesand regulations with teeth that have the fullsupport of our leaders.

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And I frequently remember an incidentin my father-in-law's life, Barb's dad, who

recently passed away at the age of 101 whowas an immigrant. And who came to thiscountry with very little and he did all right.Went into small business. Worked hard.Ended up with an estate which was adequate

but wasn't gonna be enough to pay anyestate taxes.

And he knew that. And he decided heowed so much to this country that he wantedto make a statement. And so he left a bequest

to his Uncle Sam of $10,000. We gottaremember what this country's all about toimmigrants particularly like my father-in-law.But hopefully to all of us whether we'reimmigrants, family of immigrants or other-wise. We should be inspired.

I want to close by recognizing an unsunggroup of heroes in this area. First, there arethose whose mission it is to enforce lawsgoverning business conduct. Folks like

District Attorney Robert Morgenthau andAttorney General Eliot Spitzer, who are tack-ling issues as complex as many of these taxshelters. And like William McDonough,Chairman of the new Public CompanyAccounting Oversight Board, who testified

before the Senate Finance Committee as to just how troubling these tax shelters are tothe accounting profession. Their work isaimed at more than enforcement - it is alsoaimed at changing the cultural norms.

Our unsung heroes also include the manyprofessionals who struggle for meaningfulself-regulation inside their professions, thosewho follow ethical principles, even when itputs them at a competitive disadvantage.And the professors who teach our futureleaders the principles of business ethics.There are many of these unsung heroes in thiseffort here in this room today. To each of you,I say we are in your debt. Thank you. I

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Questions & Answers

Senator Carl Levin

T

hank you for the invitation. I'd behappy to try and answer some ques-tions on this subject. Or, perhaps to

the relief of many of us who are MEGOswhen they look at this, just about any othersubject you might want to throw at me.Thank you so much.

My question is this. When you have thelargest law firms and accounting firmsinvolved in this kind of misbehavior how doyou proceed?

Well, happily everyone isn't participat-ing. Too many people are. But happily thereare some who refuse to participate in the abu-sive tax shelters and limit their tax advice to

legitimate tax advice to people who want toreduce their taxes in an honest way, which hasa business purpose or an intentional purposein the tax code.

We have a lot of ways in which peoplecan legitimately reduce the burden of taxeson them that are intended or planned by thetax code. So we're talking here about the onesthat are unintended and the transactions thathave no economic purpose at all except to,

again, reduce taxes. But you put your fingeron a huge challenge because of the complex-ity of this scheme. Not this scheme, but ofthese schemes.

The complexity makes it extremely dif-ficult to pierce through the layers are clothingthat are put on these bodies in order to tryto hide what is not going on. If there is noeconomic substance to the transaction, ifthere's no economic business purpose to

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the transaction, there are incredible lengthswhich are taken to try to hide that fact and

to make it appear as though there is an eco-nomic purpose.

And, again, there'll be three or four taxshelters a few weeks from now that we will beexploring and trying to analyze, laying out for

the public, before we have our witnesses try todefend them. But I think there are just twoways to do it that I know of, or three ways todo it. One is inside the profession. That is, forpeople to take action against those in their

own profession who are abusing the rules andtaking advantage of the difficulty and thecomplexity to hide things they're doing,which they shouldn't do. That's an internalmatter, internal to the professions. And pro-

fessions do that. Every one of our professionshas an internal mechanism to try to go afterthe abusers.

We need to strengthen their hand, thefolks that make that effort. And there are two

ways that I know of to do it. Increase penal-ties so that they are a deterrent. What wehave now in the abuse of tax shelter area - forthe aiders and abettors, the people who putthese together and market them - is a joke. A

$1,000 fine is completely irrelevant. And soyou have to have a deterrent that is real interms of the law.

And secondly, through our oversightprocess and through making public what is

going on. Trying to get the public awarenessup to the point where people will - internallyin the professions; their clients and the publicitself, acting through elected officials andappointed officials - take action against them.

So all three of those things are necessary. It'sa constant battle.

I think if we win this battle there'll besomeone here, probably speaking to anothergroup ten or 20 years from now, who have a

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similar problem or problems. It's the reasonwhy you need the Morganthaus and the

Spitzers and folks like that, who are willing totake on this kind of an issue - which is a dryissue, complicated, and difficult to make comealive for people.

Again, the difficulty is reinforced as I

mentioned in my remarks. If you're in anenvironment which is, in this case, an anti-taxenvironment, a lot of people's instinct would

be opposed to taxes. And that's fueled andfed by some of our top leaders in this country

as a matter of fact. We're in that environmentwhere taxes are viewed by a segment of ourcommunity and fueled by some of their lead-ers, who I consider to be irresponsible in thisregard, and it makes it more difficult to do

what needs to be done.And that's why you need the people who

talk about why taxes are the price of civiliza-tion. But you need all that together. But youdon't go over the goal line for good. You don't

win this football game for good. This is theannual football game between Michigan andOhio State or Notre Dame and Navy.

Senator, I was really struck by your can-did view of taxation in this country. I'mwondering how a public official can promoteand espouse taxation without committingpolitical suicide?

Well, first of all, you make your speech-es so damn dull no one can understand them.It's so that no headline writer can say, "LevinFavors Taxes." Actually, I voted against both

the Reagan and the Bush tax cuts because Ithought they were fiscally irresponsible anddeficit creators and so forth.

It's a challenge to survive in that environ-ment. But I think if you're straightforward

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and honest, you also let people who are pay-ing taxes know that they're going to be left

holding the bag if folks who should be pay-ing taxes don't pay their share. That connectsto that average voter, that average personout there.

When people hear, "Hey, let's go after the

folks who pretend to open their new officeat some tax haven," they actually keep their

business here, thank God. But they aren'tpaying taxes because they've created a new afiction that they're now totally owned by

some new entity that's off-shore and, there-fore, don't pay taxes here although they'reusing our police and fire and schools andeverything else.

If you're willing to go after those, andsometimes there's some powerful intereststhere, then that average voter out there, whenyou tell them, "Hey, I oppose this PresidentBush tax cut because I think one, two andthree," they'll be a little more forgiving. Even

though they weren't otherwise inclined, theythink you're willing to go after some powerfulinterests as well on the same subject.

But I think people like honesty. I really do.There are a lot of folks. My colleagues willtell you the same thing, how reassuring it isin a way. How you look forward to the folkswho come up to you on the street and say,"We don't agree with you on this issue butwe think you're honest." If I didn't get votes

from people who disagreed with me on alot of issues, but who voted for me anyway

because they thought I would tell themstraight what I was going to do or what theissue was, I wouldn't be in the U.S. Senate.

I've taken an unpopular position on lotsof issues including taxes during the Reaganyears. But people thought I was being straightwith them. And I was also willing to take onsome of the powerful interests, which that

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average voter wanted to be taken on in thisarea. And that combination I think persuaded

enough people in a couple of my elections not by big margins, but enough people tokeep me in office.

Senator, how deep do you think thisdiseased part of our economic tree goes interms of the Enrons of the world? In otherwords, I think there's a sense within busi-ness communities that these are very badapples but that the barrel is sound. What isyour sense? Where do you sit in terms ofcorporate ethics?

It's a deviling question. What we see arethe problems and it's hard for us to get thewhole picture. People who are in it, who arehonest, have a much better assessment as towhat the whole picture is than we do. Butwhat is particularly troubling to me, frankly,

are some of the major institutions in our coun-try the pillars of this country financially. Imean Citibank, Chase Bank, Merrill Lynchwho are involved in Enron and schemes thatare deceptive schemes.

I'm not saying Chase and Citibank aredeceptive companies. I'm saying that theywere willing to engage. And we showed howconscious, at least, the people who wereinvolved were and how they cover up stuff.

These are pillars of our community. These arebanks and you know that. You say, "My God,that's where my account is." These are thefolks we rely on.

And these are some of the best names.And I assume, for the most part, these arehonest companies. We had a major bank thatwas engaged in helping some of the mostcrooked leaders in the world hide theirmoney. Major institutions. Does that mean the

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whole institution is polluted? No, I don'tbelieve that's true.

And yet when you've got some of thenames, these are proud names with hugereputations that then will go about with lead-ership cleaning up their act. Firing peoplewhere they need to fire people and so forth.But how deep it permeates? I cannot giveyou an honest assessment, other than to saythere's too much of it. But I can't tell you it'sfive percent, ten, 20, 30. I just don't know. Iguess, I'm like a police officer in this regard.

You know, somebody who sees bad thingsgoing on all the time, sooner or later you justwonder if you're a police officer. "My God, isthis the way the world is?" I mean, everyday

just constantly arresting the drug runnersand the bad guys. But that's not the way theworld is. That's five percent or two percent ofthe world.

And yet to that police officer it's his life'swork. It's like the judge. You got a judge sit-ting here who sees case after case after case infront of her where there are bad things hap-pening. And she has, somehow or other, gotto separate that from her world and her fam-

ily so that it doesn't affect that. But then she'llmake a judgment. If I asked Judge Uvillerright now, what percentage of the world arelike the people that come in front of her, I'd

be interested in her answer. But I'm not going

to embarrass her here because it would looklike I'm ducking the answer to the question.

But it's kind of the same thing, youknow? We all have to do that, whether we're

judging people or enforcing the law, or inmy position. I hope it's a small percentage.But whatever it is - because of the tremen-dous reputation of some of the institutionsthat are involved here it's too deep and toodiscouraging.

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Senator, you mentioned the fine is$1,000. Have you formulated what you thinkmight be a more appropriate penalty and canyou name a specific figure?

I have not. Actually, I've reviewed them

personally just in the last couple of weeksas we're preparing for these hearings. Welook, and the taxpayer actually has somereal jeopardy here, the taxpayer himself orherself because there you can get the

money back. The IRS can get all the moneyback and impose a penalty.

It's all the aiders and abettors all thepeople who concocted this scheme, peddledthem, marketed them, sold them to thetaxpayer - who get not even a slap on thewrist, in terms of any realistic assessment.And so I don't know what our bill will doin terms of new penalties to try to deterthis kind of behavior by the accounting

firms and the lawyers and the investment banks and so forth that participate in theabusive shelters.

I don't know where we're going to landon that, except to say what's there now istotally inadequate. And it's something,frankly, which shocked us. We should haveknown it. I guess we should know every-thing that's in all of our law books. But thiscame as a real surprise to us. And I'd say of

all the things we've learned, I'd say that, plusthe marketing, including the telemarketing,of these tax shelters.

The way in which, instead of the taxpayer

coming into the accountant seeking advice,it's this peddling of these generic shelterswith cold phone calls going to thousandsof people. That is a pretty stunning shift inthe way tax advice should be given and usedto be given. I

Q.

A.

milstein criminal justice policy forum: mass marketing of abusive tax shelters

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