'Dubious' tax shelter leads to $10 million lawsuit.

Howard Ruby, chairman of Los Angeles-based corporate housing and apartment developer Oakwood Worldwide, has filed a $10 million lawsuit alleging he was induced into investing in KPMG LLP tax shelters now under investigation by federal prosecutors and the Internal Revenue Service.

In a complaint filed in L.A. Superior Court, Ruby claims he invested $2.9 million in 1999 in a KPMG tax product called a Bond Linked Premium Structure, or BLIPS, that was supposed to generate a $40 million tax loss in about 60 days. KPMG created the tax product specifically for clients with "significant ordinary or capital gains income," the complaint says.

Ruby claims that despite assurances and an opinion letter from Carl Hasting, a partner in the firm's Los Angeles office, KPMG knew the product was unlikely to survive an IRS court challenge, the complaint says. BLIPS are now among several KPMG tax-reduction products under investigation by federal prosecutors, the IRS, the Securities and Exchange Commission and a Senate investigative subcommittee.

"It's hard to imagine that KPMG and the other reputable firms that sold BLIPS to investors would have done so without disclosing the vast amount of knowledge they had regarding just how dubious a tax shelter BLIPS was," said Dale Kinsella, a partner at Greenberg Glusker Fields Claman Machtinger & Kinsella LLP representing Ruby. Kinsella declined to comment further, and Ruby did not return phone calls.

KPMG spokesman Greg Dvorken said, "We believe the allegations in this case are without merit."

According to the suit, Ruby invested in the tax package after Hasting and law firm Sidley Austin Brown & Wood provided independent opinion letters assuring him the IRS would allow a deduction for losses generated by BLIPS. Sidley Austin was named in the suit. William Conlon, a partner at the firm, did not return phone calls.

In the complaint, Ruby said he did not question BLIPS until he saw a Senate report on tax shelters that was released in November 2003. Ruby claims he found that two accountants and one partner at KPMG had warned the firm's management in 1999 that BLIPS were unlikely to survive an IRS challenge.

Ruby is seeking $10 million, plus punitive damages, including his initial investment and taxes he paid because of the BLIPS.