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Peter T. Loftin of Highland Beach, Fla., is not a happy telecom tycoon. The Internal Revenue Service is auditing him. He’s acknowledged owing millions of dollars in back taxes, interest and possible penalties. Now, the beleaguered Loftin has gone to federal court in West Palm Beach, Fla., where he’s pointing the finger at his former accountants and bankers. Loftin built a fortune as founder and chairman of privately held BTI Telecom Corp. in Raleigh, N.C. The former door-to-door salesman has also spent a fortune — including $19 million in 2000 for the Miami Beach mansion once owned by murdered fashion designer Gianni Versace. Loftin, who was 24 when he founded BTI in 1983, sued KPMG LLP and First Union National Bank, now known as Wachovia Corp., on Dec. 30. The gist of the 25-page racketeering and fraud complaint: that KPMG and First Union induced him into sinking $30 million into illegal, unregistered tax shelters that since have become the focus of an IRS fraud crackdown. KPMG is also accused of malpractice. Why did the accountants and bankers allegedly do that? Big fees. KPMG and another accounting giant, BDO Seidman LLP, were sued last July by the IRS, which was seeking to obtain documents about the tax shelters, the Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). In court filings in Washington, D.C., the IRS disclosed the names in 2001 of about 160 wealthy tax shelter clients, including Loftin. Better-known clients included the late race-car driver Dale Earnhardt, New Line Cinema Chairman Robert Shaye and Bill Simon, the losing Republican candidate for governor of California in November. Many of KPMG’s former tax clients and their lawyers now have banded together to negotiate with the IRS and call themselves the “Alliance Group,” the complaint says. Loftin’s tax problems began in 1997 when he sold his stake in BTI subsidiary FiberSouth to BTI for $30 million. BTI is what’s called an integrated communications provider. It offers customers, mostly small and medium-size businesses in the Southeast, an array of communications services including local and long-distance phone service and high-speed Internet access. The company’s Web site says it has annual revenues in excess of $271 million. Loftin’s complaint says he initially put the $30 million into an account at First Union in Charlotte, N.C. Soon, though, Loftin was meeting with First Union tax planners who suggested he retain KPMG. The next day, representatives of the bank and the accounting firm met with Loftin to explain what they pitched as a “no lose” tax avoidance strategy. The idea was to use a company based in the Cayman Islands, Larkhaven Capital, to generate losses from the sale of stock and warrants that were later used by Loftin to offset his large capital gains. “KPMG pressured Mr. Loftin by representing to him that ‘there were very few spots left’ and therefore he would have to act quickly. Moreover, KPMG told Mr. Loftin that he could not retain the services of any outside professional to counsel him as to the transactions as the tax strategy was ‘confidential,’” says the complaint filed by attorney Kenneth J. Vianale. Vianale, a partner in the Boca Raton, Fla., office of Milberg Weiss Bershad Hynes & Lerach, declined comment. Vianale recently announced plans to leave Milberg to establish his own practice. KPMG said QA Investments LLC, a subsidiary of Seattle-based Quellos Group LLC, and the Wall Street law firm Brown & Wood later certified the “economic substance” of the illegal tax strategy. Brown & Wood merged in May 2001 and became Sidley Austin Brown & Wood. QA and Quellos are co-defendants with KPMG and First Union in the racketeering and fraud allegations, but the law firm is not. A series of transactions followed. The end result: Loftin’s 1997 federal income tax return, prepared by KPMG, listed $27.4 million in capital losses from the tax strategy, the lawsuit says. In October 2000, the IRS audited Loftin’s 1997 tax return. Those huge capital losses are now the source of Loftin’s liability. Loftin’s suit says his accountants and bankers failed to disclose to him that the tax shelters were “likely to be found improper by the IRS” and that KPMG had failed to register them with IRS as required by law. “Had Mr. Loftin been advised of the true risks associated with the tax strategy, he would not have agreed to implement it and, instead, would have availed himself of traditional tax planning strategies,” the complaint says. A spokesman at KPMG’s headquarters in Montvale, N.J., said the company did nothing wrong. “We provide tax planning services for clients in an appropriate manner. We believe the allegations are without merit,” spokesman Bob Zeitlinger said. Officials of Wachovia and Quellos both declined comment. Loftin is seeking to recover at least $3.9 million in fees and other compensation he paid for that allegedly bad tax advice, and he wants the treble damages allowed by the federal civil RICO statutes. Except for $100,000 paid to First Union, the complaint does not describe how most of those fees were apportioned. A civil lawsuit similar to Loftin’s by another unhappy tax shelter client was filed against KPMG and QA Investments in U.S. District Court in Orlando, Fla., last year. The plaintiff in that pending case is Joseph Jacoboni, the former owner of Software Support Inc. Today, the IRS audit of Loftin continues. But Loftin is actively seeking to end it. “Mr. Loftin has now committed to pursue settling his tax liability with the IRS and will likely have to pay substantial tax repayments, plus undetermined interest and is subject to potential penalties,” the complaint says.

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