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Thursday, August 10, 2006 - Page updated at 12:00 AM

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Quellos Group says it is subject of IRS inquiry

Seattle Times business reporter

Quellos Group, the giant Seattle-based hedge-fund firm, acknowledged Wednesday that it has received subpoenas from a federal grand jury investigating abusive tax shelters, and is the subject of an Internal Revenue Service inquiry.

Michael Gross, a spokesman for Quellos, said several Quellos executives and affiliated companies received the subpoenas in February, and have been cooperating by providing information to the grand jury in Manhattan. But neither Quellos nor its executives are targets of the probe, Gross said.

Gross also confirmed that the IRS has been looking into the firm's tax-shelter activities.

The New York Times on Wednesday reported the subpoenas and the IRS inquiry. It said the grand jury has been investigating the explosive growth of abusive tax shelters in the 1990s and early 2000s, and the roles played by major financial-services firms (including Deutsche Bank and Ernst & Young) and their employees in creating and marketing the shelters.

Sixteen former employees of the accounting firm KPMG face criminal charges stemming from their tax-shelter work.

In the mid- to late 1990s, Quellos helped KPMG structure, market and implement a tax shelter dubbed FLIP and played a lesser role in executing a successor product, according to a 2003 U.S. Senate investigation of the tax-shelter industry and the firm's own testimony.

A follow-up report released last week by the Senate's Permanent Subcommittee on Investigations said that Quellos, after its relationship with KPMG had ended, developed its own offshore tax shelter that helped five rich clients avoid paying $300 million in income taxes.

Quellos has characterized its strategies as legitimate tax planning and said that, in any event, it's no longer in that business.

"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," Gross said in a written statement. "Our reputation and integrity are paramount to us. ... We remain committed to cooperating with the government."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

Copyright © 2006 The Seattle Times Company

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