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VOL. 123 | NO. 45 | Wednesday, March 5, 2008

New Details Allege Memphis Adviser Part of Tax Scheme

By Andy Meek

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Federal prosecutors recently added a Memphis-based investment adviser to a group of defendants they say was involved in a broad conspiracy to create and sell dubious tax shelters to wealthy clients.

Memphis businessman Charles Bolton is one of two new defendants added in a superseding indictment filed in U.S. District Court for the Southern District of New York. That indictment also brings new charges against an existing group of defendants including current and former partners of Ernst & Young, one of the largest accounting firms in the world.

Weighty allegations

The new indictment was handed down last month in the course of an expanded probe into the tax shelter practices at Ernst & Young, which is not named as a defendant in the federal case. Bolton was arraigned in New York Feb. 22 and released on a $3 million bond.

Details of the scheme just released by prosecutors describe how six defendants - including Bolton - allegedly designed and sold fraudulent tax shelters to clients with incomes generally between $10 million and $20 million. In addition to helping
implement those tax shelters for Ernst & Young clients, Bolton is accused of using some of those same tax shelters to benefit himself.

Bolton's attorney, Howard Heiss, a partner in the New York office of O'Melveny & Myers LLP, described the government's case as comprised of "baseless accusations."

Prosecutors argue that Bolton reduced and deferred his own personal tax liability on more than one occasion by using some of the same complicated transactions he helped market to clients to lighten their own tax bills. One of the questionable tax shelters Bolton allegedly used gave him a nearly $15 million tax deduction in 2000 and a $25 million deduction the following year, according to the recent indictment.

Bolton was audited and ultimately gave sworn testimony in April 2005 to the IRS about the transactions. The following year, the IRS told him it didn't buy his story.

"On or about July 28, 2006, the IRS notified Bolton that it intended to assert penalties against Bolton for claiming losses from (the tax shelters) on his 2000 and 2001 tax returns," the indictment states. "In its notification letter, the IRS informed Bolton of its view that 'a significant purpose' of Bolton's transactions was tax avoidance."

Until proven guilty

Heiss defends his client partly by insisting that Bolton did not have the complicated tax law know-how needed to perform the actions he's accused of.

"The charges against Chuck Bolton are unfounded, and the government's decision to prosecute him is unreasonably aggressive," Heiss said, reading a prepared statement when reached for comment. "Mr. Bolton is an investment adviser 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. We intend to fight these baseless accusations."

One of the overarching goals of the alleged tax evasion scheme, according to prosecutors, was to prevent wealthy Ernst & Young clients from taking their business to other accounting firms. It was also intended that Bolton's own financial companies would land some of that business from Ernst & Young clients, they allege.

Tax shelters can be broadly defined as an investment strategy that either lessens or eliminates a tax liability. One of the ways the tax shelters implemented in the scheme and outlined in the indictment could have passed muster was for them to have been part of a legitimate business strategy.

The bottom line of the federal case, however, is that money invested in the shelters doesn't appear to have been put at risk. Only the illusion of risk was created, because the shelters' sole purpose was to avoid taxes.

" ... Instead of wealthy clients paying U.S. individual income taxes that were legally owed (generally between 20 percent and 40 percent of their taxable income), the clients could pay total costs calculated largely as a percentage of the desired tax loss or deduction generated by the particular tax shelter," the indictment reads.

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