Two additional defendants have been charged with criminal tax fraud in a tax shelter case involving current and former partners at Ernst & Young.
In May 2007, the Justice Department filed an indictment alleging that four current and former E&Y partners - Robert Coplan, Martin Nissenbaum, Richard Shapiro and Brian Vaughn, along with co-conspirators - concocted and marketed tax shelter transactions designed for wealthy individuals to eliminate or defer their tax liabilities. The government said they took steps to prevent the IRS from detecting their clients' use of the tax shelters, knowing the IRS would aggressively challenge the tax shelters.
The superseding indictment charges two additional individuals - David L. Smith, 51, of San Francisco, and Charles Bolton, 45, of Memphis, Tenn. - with participating in the same conspiracy, and it charges all six defendants with additional offenses.
According to the superseding indictment, in late 1998 or early 1999, Smith introduced a fraudulent tax shelter called CDS to the E&Y defendants, and later that year, used his company, the Private Capital Management Group, to implement CDS transactions for wealthy clients identified by E&Y. Early in 2000, Smith licensed the CDS idea to Bolton, and a group of companies owned by Bolton began to implement the same fraudulent shelter for additional wealthy clients of E&Y.
According to the new allegations, both Smith and Bolton gave false and misleading testimony under oath when interviewed by the IRS in connection with audits of various taxpayers who implemented CDS.
The indictment also alleges that Bolton utilized two CDS transactions to defer his own tax liability on millions of dollars in fees collected from tax shelter clients. In December 2001, in the space of 17 days, Bolton used a CDS shelter to generate a tax deduction of approximately $24.9 million, which he used to offset his tax shelter fee income. Later, when audited by the IRS, Bolton denied that tax avoidance was a significant factor in his decision to implement the shelter.
Howard Heiss, an attorney for Bolton, defended his client. "The charges against Chuck Bolton are unfounded and the government's decision to prosecute him is unreasonably aggressive," he said. "Mr. Bolton is an investment advisor with little if any tax expertise who made money for investors in transactions that he believed in good faith had economic substance and were lawful."
Smith, who was involved in developing tax shelters for years before founding PCMG, is also charged with evading his own taxes on $18.4 million earned in 1998. Smith and Bolton, along with the E&Y defendants, are scheduled to be arraigned in San Francisco on Feb. 22. Meanwhile, the investigation is continuing.
According to E&Y spokesperson Charles Perkins, two of the partners who have been indicted are on leave and two are former partners, but the firm itself is not a defendant in the case. Otherwise, E&Y had no comment. Smith could not be reached for comment.
