US Government Advances On Tax Shelter Front

by Mike Godfrey, Tax-News.com, Washington

27 January 2006

Following the recent settlement between Big Four accounting firm KPMG and the Justice Department over its role in selling abusive tax shelters, the US government has taken its tax shelter fight another step, and is reportedly investigating three lawyers at the prominent Dallas-based firm, Jenkens and Gilchrist for their role in certifying abusive tax schemes.

According to a New York Times report, three lawyers at the firm's Chicago practice, the centre of its tax operations, are under investigation for signing off so-called opinion letters testifying to the legitimacy of tax shelters such as COBRA (currency options bring reward alternatives), which was outlawed by the IRS in 2000.

However, the report said that there is no indication that the law firm itself is a target of the criminal investigation, and a spokesman revealed that the company is "cooperating fully" with the investigation.

Often costing $75,000 or more each, investors use opinion letters as an insurance policy if challenged by the authorities, showing they took steps to ensure that a particular transaction was legally watertight.

One of the lawyers under investigation is said to have earned $93 million in fees from 1999 through 2003 by selling opinion letters and by designing and selling certain shelters, the Times reported, citing persons familiar with sealed documents filed in connection with a previous civil case brought by investors against Jenkens & Gilchrist.

It is believed by the Treasury Department that at least $2.4 billion in artificial tax losses have been claimed by clients of the law firm stemming from their use of tax sheltering arrangements.

It is not the first time that Jenkens & Gilchrist has come under the spotlight for its role in formulating and selling tax shelters. In 2004, a federal judge ordered the firm to hand over the names of clients who invested in tax schemes formulated by its Tax and Estate Planning Practice Group and its Structured Investment Practice, between June 1998 and June 2003. It marked the first such summons to have been issued to a law firm to obtain the identities of participants in tax shelters deemed abusive by the IRS.

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