[JURIST] A federal judge in Texas has ruled that the US Internal Revenue Service [official website] improperly applied 2003 Treasury Department regulations retroactively when it determined that the BLIPS tax shelter, which stands for "bond linked issue premium structure," is invalid. US District Judge John T. Ward's ruling comes in a civil lawsuit where plaintiffs are seeking refunds for IRS decisions to deny their claimed deductions stemming from BLIPS. The issue of whether the tax shelter has no economic substance or business purpose, the necessary standard for the IRS to declare a shelter invalid, remains to be decided at trial.

Ward's ruling is particularly significant in light of the criminal prosecution of 19 former KPMG executives [JURIST report], which is based in part on the alleged illegality of BLIPS. The revised indictment [PDF text] in the Manhattan criminal case accuses 17 former KPMG executives, a lawyer, and an investment advisor, of attempting to defraud the IRS through fraudulent tax shelters, filing fraudulent individual income tax returns containing the tax shelter losses, and concealing the shelters from the IRS. In August 2005, KPMG itself settled with federal prosecutors [JURIST report], avoiding an indictment by agreeing to pay a $456 million fee, accepting independent monitoring of its activities, and acknowledging their wrongdoing [KPMG press release, PDF]. As required by the settlement, KPMG admitted [IRS press release] that personnel deliberately concealed the existence of BLIPS tax structures by, "among other things, failing to register the shelters with the IRS as required by law; fraudulently concealing the shelter losses and income on tax returns; and attempting to hide the shelters using sham attorney-client privilege claims." The New York Times has more.