Funny Tax Shelters Under the Gun at Fund Firm

A Seattle hedge fund firm has come under scrutiny as a result of its work with questionable tax shelters. Last week, for the second time in three years, a Senate subcommittee described the firm, the Quellos Group, as a maker and seller of abusive tax shelters, focusing on a high-end shelter that helped five wealthy clients shield $2 billion in taxes.

The firm rejects such characterizations, saying that its tax shelter work, which began in the mid-1990’s and ended in 2001, was not only legitimate, but also small and separate from its main business. But it was the tax shelter work that helped Quellos become one of the largest sellers of funds-of-funds, or funds that invest in hedge funds, former senior employees say. Quellos now manages more than $15 billion in assets for clients like the Hong Kong Jockey Club and the University of British Columbia.

The firm’s work on questionable shelters is drawing increasing attention from federal prosecutors, highlighting how the late 1990’s boom in aggressive shelters continues to haunt investment firms, banks and accounting and law firms that played a part in their creation and sale. Senate investigators have estimated that abusive tax shelters cost the Treasury more than $100 billion in unpaid taxes in recent years.

Earlier this year, senior Quellos executives and Quellos-affiliated firms received subpoenas from a federal grand jury in Manhattan, which has been investigating the roles played in abusive tax shelters by individuals and companies. including former employees of the accounting firm KPMG, 16 of whom are under criminal indictment stemming from their tax shelter work. Quellos and its current and former employees are not targets in the investigation, according to people close to the inquiry.

Michael Gross, a Quellos spokesman for said that “long ago we ceased involvement in the area of tax-advantaged strategies, which was never our core business, and we are deeply disturbed by the recent unfair and inaccurate portrayal of our firm and its activities.’’ Like what else would you expect him to say?

http://www.nytimes.com/2006/08/09/business/09shelter.html