Darleene Barrientos
Assemblywoman Carol Liu (D- La Canada Flintridge) might face trouble
from the IRS under a law passed by a fellow lawmaker after setting up
what might be considered a fraudulent tax shelter, based on advice
from an accounting firm.
Liu and her husband, Michael Peevey, a member of the state's
Public Utilities Commission, sued Arthur Andersen LLP, alleging the
firm gave them bad advice when it devised a tax plan to give the
couple a bigger tax break from a charitable $1 million donation to UC
Berkeley, Liu's alma mater. The breach-of-contract lawsuit filed last
month in Los Angeles Superior Court asks for $34 million from the
national accounting firm.
Liu and Peevey allege the firm knew the move was "very risky" and
"without 'substantial authority' in accordance with the Internal
Revenue Code," according to the lawsuit. It also alleges the firm
said the strategy was in accordance with Internal Revenue Code,
despite proposed legislation that outlawed some charitable gift
strategies. After the couple paid Arthur Andersen $250,000 to set up
the trust in August 1999, the U.S. Treasury Department issued an
opinion that the move was illegal. The couple was not told about the
violation until March, according to the lawsuit.
The couple has already paid $225,000 defending the ongoing audit
and could face $2 million in tax penalties. Liu's staff referred
inquiries to her attorney and Liu did not return a call for comment
Friday.
"Arthur Andersen approached them with the strategy," said the
couple's attorney, Darren Enenstein. "They relied on their advice.
Before that opinion letter was issued to Carol and Mike, the IRS
already had proposed regulation. They were never told about it.
Arthur Andersen was more interested in making a quick buck than
protecting their client."
Patrick Dorton, a spokesman for Arthur Andersen, declined to
comment Friday on the lawsuit.
The strategy sold to Liu and Peevey is the type of illegal
activity Assemblyman Dario Frommer (D-Glendale) was targeting when he
introduced legislation to crack down on abusive tax shelters. Frommer
estimated the state would earn about $90 million from delinquent
taxpayers, but that figure that has swelled to $1.3 billion.
The new law, which was signed by outgoing Gov. Gray Davis in
October, stretched the statute of limitations to prosecute cheaters
from four to eight years. Taxpayers caught using illegal tax shelters
are also required to pay overdue tax liabilities, a 100%
interest-based penalty and fraud penalties under the law. Consultants
and accountants who advise tax cheaters of where they can hide money
were also targeted.
Frommer declined to comment Friday.
