Shelters Leak on Tech Execs

Five individuals, four with ties to Cisco Systems, have sued Ernst & Young over a tax-shelter product that has been called into question by the Int...
Stephen TaubFebruary 16, 2007

Five Silicon Valley executives are suing Ernst & Young, claiming they owe millions of dollars because of tax shelters they bought from the Big Four accounting firm, according to The San Jose Mercury News. Four of the plaintiffs have ties to Cisco Systems, the newspaper noted.

In 2004 the executives also reportedly sued Dallas law firm Locke, Liddell & Sapp, which provided a legal opinion that the shelters would meet with Internal Revenue Service approval. The IRS estimates that the shelters would generate $150 million in tax losses, according to the Mercury News.

The newspaper identified the five plaintiffs as Alexandre Balkanski, a venture capitalist for Benchmark Capital, who invested nearly $7 million; Robert L. Puette, a former CEO of two companies, onetime Apple Computer president, and former Cisco director, nearly $7 million; Thomas Fallon, a former Cisco vice president, $8 million; Carl Redfield, a senior vice president at Cisco, $10 million; and Richard Timmins, Cisco’s vice president of worldwide sales and service finance, $20 million.

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The lawsuit dates to the late 1990s, according to the Mercury News — a time when shelters were heavily marketed to wealthy investors so they could avoid taxes. The tax-shelter product in question is related to one that was popular at the time — but also complex and controversial — called a “contingent deferred swap.”

The plaintiffs reportedly assert that they bought the Ernst & Young shelters after Locke, Liddell & Sapp provided an opinion letter stating they would survive IRS scrutiny. In May 2002, however, the agency announced it would challenge the shelters, the newspaper noted.

The executives now reportedly claim that the opinion letter was not from an independent third party because the accounting firm and the law firm were acting “in concert” to develop the shelter.

Contacted by the Mercury News, Ernst & Young spokesman Charles Perkins declined to comment, saying the firm had not yet seen the lawsuit. The plaintiffs either declined comment to the paper or were unavailable for comment.