“The Internal Revenue Service, as part of an effort to curb abusive tax shelters, reached a settlement resulting in Merrill Lynch & Co. making a ‘substantial payment’ in connection with corporate tax shelters that the brokerage firm marketed a decade ago to big-name clients,” writes Randall Smith in today’s Wall Street Journal.

“The settlement involves Merrill’s failure to register tax shelters that generated losses through transactions, later determined to be shams, that were designed to save companies hundreds of millions of dollars in taxes with deductions that eventually were disallowed.”

“The pact could signal similar actions in the future against other tax-shelter promoters. These promoters include securities, accounting, and law firms, according to Deborah Nolin, deputy IRS commissioner for the agency’s large- and midsize-business division. Although Ms. Nolin wouldn’t discuss the Merrill settlement, she said it was part of a ‘strategic initiative’ to rein in illegal tax shelters.”

“In its brief announcement, the IRS said it ‘reached an agreement with Merrill Lynch resolving issues relating to tax-shelter registration penalties’ under a series of IRS rules which impose penalties for promoting abusive tax shelters, for aiding and abetting the understatement of tax liabilities and for failing to register the shelters and maintain a list of their participants. In agreeing to the first-of-its-kind settlement, Merrill avoids possible civil sanctions.”

“The tax-shelter structure, which Merrill marketed to eight major corporate clients in 1989 and 1990, was disallowed by the IRS in multiple decisions later upheld by the U.S. Tax Court. The exotic transactions, which involved contingent installment sale notes, were first described publicly in a series of Wall Street Journal articles beginning in 1990.”

“The IRS said in its statement that ‘under the terms of the agreement, Merrill Lynch neither admitted nor denied’ that the tax shelters in question were ‘required to be registered.’ “

“The agency said that Merrill has also ‘implemented a general tax review for investment vehicles it markets. The review process is intended to assure compliance with tax-shelter registration and listing requirements under federal tax laws.’ “

“In a statement, Merrill said, ‘This concludes this matter involving the registration of transactions that occurred more than a decade ago. We decided it was in the best interests of all parties to resolve this matter.’ A Merrill spokesman said the amount of the payment, which wasn’t disclosed, wasn’t ‘material’ to the company’s financial results. The amount was understood to be under $10 million.”