Tax Shelter Probe Sinks Esteemed US Law Firm

by Leroy Baker, Tax-News.com, New York

03 April 2007

The US Internal Revenue Service has announced that it has reached a settlement with the law firm Jenkens & Gilchrist, over the firm’s alleged promotion of abusive and fraudulent tax shelters.

According to prosecutors, J&G violated tax law concerning tax shelter registration and maintenance and turnover to the IRS of tax shelter investor lists. The company has agreed to pay $76 million to settle with the IRS.

The firm is accused of marketing potentially abusive listed tax shelter transactions to high-net-worth individuals, such as COBRA (Currency Options Bring Reward Alternatives); BEST (Short Option/Basis Enhancing Securities Transaction); BLISS (Basis Leveraged Investment Swap Spreads); OPS (Option Partnership Strategy); BEDS (Basis Enhancing Derivatives Structure); and BOSS (Bond & Option Sale Strategy).

The firm also marketed two transactions that are not listed including HOMER (Hedge Option Monetization of Economic Remainders) and BART (Basis Adjustment Remainder Trusts).

The IRS estimates that 1,400 investors are affected by the firm’s advice and will owe interest and penalties on their underpayment of tax.

Jenkens & Gilchrist, which was once a 600-lawyer national firm, is in the process of winding down its legal practice and business affairs, and the firm has been cooperating with the US Attorney for the Southern District of New York since 2004. Under the terms of an agreement with the attorney's office, J&G Texas will remain in operation to wind up J&G’s business affairs, and to ensure continuing cooperation with the office, the IRS, and the Tax Division of the Department of Justice in ongoing criminal investigations and in any resulting prosecutions, as well as in civil tax matters.

“While it is unfortunate that the 56-year-old national firm of Jenkens & Gilchrist is terminating its legal practice," said IRS Commissioner Mark W. Everson., "this should be a lesson to all tax professionals that they must not aid or abet tax evasion by clients or promote potentially abusive or illegal tax shelters, or ignore their responsibilities to register or disclose tax shelters. Pursuing abusive tax shelters is a top priority for the IRS.”

In a statement released last week, J&G said that its tax shelter practice was spearheaded by tax practitioners in the firm's Chicago office who are no longer with the firm.

"Those responsible for overseeing the Chicago tax practice placed unwarranted trust in the judgment and integrity of the attorneys principally responsible for that practice, and failed to exercise effective oversight and control over the firm's tax shelter practice," the statement said. "Unfortunately, that misplaced trust and reliance extended to our initial response to the IRS and led to public statements we issued in support of our legal opinions."

"The Chicago tax shelter practice seriously undermined this firm's long-standing reputation, revenues, and stability," the firm continued. "We appreciate the willingness of the US Attorney's Office and the IRS to consider those factors, as well as the cooperation we have provided to the Government since 2004, in determining an appropriate resolution of the grand jury and tax proceedings."

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