A federal court in Texas has rejected a tax shelter once sold by KPMG, in a significant win that continues to lay the legal foundation for the government’s case against 16 former employees of the accounting firm and two outside advisors.

Last week’s decision is the first civil ruling on the legitimacy of the Blips tax shelter -- which stands for a bond-linked issue premium structure. The judge in the case found that Blips was not a real investment; that its loans were fake and that it had no economic substance or genuine business purpose. That language echoes the Internal Revenue Service’s definitions of a bogus tax shelter. Similar arguments have been made in New York, by prosecutors pursuing both Deutsche Bank and the KPMG defendents.

According to previously disclosed internal Deutsche Bank documents, Blips was created and sold primarily by Deutsche Bank, KPMG and Presidio.

The Texas ruling is also notable because it absolves the guilt two wealthy Texas Blips investors -- Harold W. Nix and C. Cary Patterson, who were part of the team that earned fees in the late 1990s working on a $17-billion tobacco settlement for the state of Texas. The men had sued the IRS after the agency disallowed their claims for around $25 million in losses stemming from Blips on their federal tax returns from 2000 through 2002.

The judge ruled that both investors must pay the taxes they owe, but that they were not liable for multimillion-dollar penalties stemming from their use of Blips.

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