Snared by Their Shelters
As one of the state's top energy regulators, Michael Peevey is familiar with complicated schemes. Now he finds himself caught in one.
In the late 1990s, he started and sold his own energy company, came away with $10 million in stock from its new owner -- a company called Applied Energy Systems -- and plenty of advice. At the advice of accountants, he put the proceeds into an investment plan that promised to shield his windfall from taxes and produce an additional $1 million for a gift to UC Berkeley, his alma mater.
"I was assured the transaction was low-risk and safe," recalled Peevey, now the president of the state's Public Utilities Commission.
A few years later, he and his wife, Assemblywoman Carol Liu (D-La Canada Flintridge), heard from the Internal Revenue Service. By the agency's accounting, the couple owed Uncle Sam $2.36 million. The state would soon be demanding $1.1 million on top of that.
Peevey is now suing his accounting firm, Arthur Andersen, for $30 million. The firm, Peevey said, "let me down, and I think they took advantage of our long-standing relationship."
Tax evaders or victims, the La Canada Flintridge couple have landed in the middle of a national uproar over questionable tax shelters. Peevey and Liu are among thousands of wealthy Americans who used the sophisticated strategies to avoid paying billions of dollars in taxes.
Ordinary taxpayers are the ones harmed by this, says a former head of the Internal Revenue Service. "Everybody is paying 15% more than they should be to cover these free riders," said Charles Rossotti, who ran the IRS for five years until 2002.
Investigators say they are only now learning just how widespread the abuses are.
In California, state officials began to crack down last year, figuring they could collect an additional $90 million in back taxes. Regulators were stunned when they collected $1.3 billion from 1,200 taxpayers.
And now, California tax officials have put 40 more auditors on shelter investigations to see just how far the trail leads.
Federal agents, meanwhile, are sharing leads with investigators in California and other states on more than 28,000 taxpayers known to have used tax-avoidance schemes. One particular shelter that was mass-marketed to millionaires is believed to have cost the federal treasury $6 billion.
Michael Peevey's tax turmoil began in the summer of 1999 at a meeting in downtown Los Angeles with several officials from Andersen.
