Jenkens & Gilchrist Closing After Admitting Role in Tax Fraud
Dallas firm to pay IRS $76 million, aid in investigation of shelters
05:36 AM CDT on Friday, March 30,
2007
By TERRY
MAXON / The Dallas Morning News
tmaxon@dallasnews.com
Jenkens & Gilchrist,
once the largest law firm in Dallas, has admitted
promoting fraudulent tax shelters and will pay
the Internal Revenue Service $76 million and
go out of business, the IRS and the U.S. attorney
in New York announced Thursday.
Dallas-based Jenkens & which at its peak
in 2001 had more than 600 lawyers, including
263 here - will cease operations as a law
firm on Saturday, although it will continue as
a legal entity while it wraps up its affairs.
"While it is unfortunate that the 56-year-old
national firm of Jenkens & Gilchrist is terminating
its legal practice, 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," IRS Commissioner Mark W. Everson
said.
U.S. Attorney Michael J. Garcia said the Justice
Department has agreed not to prosecute the firm
in exchange for its "acceptance of responsibility
for developing and marketing fraudulent tax shelters" and
its agreement to cooperate as the investigation
into the tax shelters continues.
The deal doesn't protect any individuals at
Jenkens connected to the tax shelters.
"Jenkens & Gilchrist lawyers designed,
sold, implemented and provided legal opinions
for illegal tax shelters. These fraudulent cookie-cutter
shelters purported to generate well over a billion
dollars in tax losses and eliminate hundreds
of millions of dollars in taxes owed by wealthy
clients," Mr. Garcia said.
"They sounded too good to be true, and
they were too good to be true," he said.
The tax shelters in question were handled by
Jenkens' Chicago office, headed for several years
by tax lawyer Paul Daugerdas, who joined Jenkens
in late 1998 and left at the end of 2005.
Jenkens has acknowledged that Mr. Daugerdas
and other Jenkens attorneys ran a high-profit
practice that provided opinion letters vouching
for the tax shelters in exchange for huge fees.
The tax shelters were pitched to well-to-do
clients as a way to generate paper losses to
offset large gains from other investments. The
IRS disallowed the shelters, saying they had
no real business purpose, involved no risk and
were created only to avoid taxes.
The IRS said about 1,400 investors "are
affected by the firm's advice and will owe interest
and penalties on their underpayment of tax."
Jenkens chairman Patrick Mitchell declined Thursday
to discuss any details, including the terms of
its agreement with the Justice Department and
the IRS or how it will pay the settlement.
"We are certainly pleased to have all the
issues involved with our Chicago tax practice
behind us," Mr. Mitchell said. "The
terms are confidential, but we are very pleased
to move forward."
Firm's statement
In a statement from Jenkens released by Mr.
Garcia's office, the firm admitted that its activities
were illegal, and blamed its Chicago office:
"We believe certain J&G attorneys developed
and marketed fraudulent tax shelters, with fraudulent
tax opinions, that wrongly deprived the U.S.
Treasury of significant tax revenues," Jenkens
said in its statement.
"The firm's tax shelter practice was spearheaded
by tax practitioners in J&G'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 firm 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. Our prior support
for the opinions adversely affected the efforts
of the IRS to assess and collect tax revenues.
We deeply regret our involvement in this tax
practice, and the serious harm it caused to the
United States Treasury.
"The Chicago tax shelter practice seriously
undermined this firm's long-standing reputation,
revenues, and stability. We appreciate the willingness
of the U.S. 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," Jenkens
concluded.
The IRS sued Jenkens in 2003 to get the names
of clients who had invested in tax shelters,
which went under such names as COBRA, BOSS and
Son of BOSS. A federal judge in 2004 ordered
Jenkens to make the names of the clients available.
Settlement with clients
Hundreds of clients, facing penalties on top
of taxes and interest, sued Jenkens and others
involved in the tax shelters. Most of the plaintiffs
agreed to an $81.55 million settlement, which
will be distributed next week. Jenkens' share
of that settlement was $5.25 million, with insurers
and other defendants paying the rest.
Unable to resolve the problems caused by the
tax shelters, Jenkens has been working to find
new homes for its attorneys since late 2006.
Most of its remaining Dallas lawyers and staff
are expected to move soon to the Dallas office
of Hunton & Williams, a national firm based
in Richmond, Va.
However, neither Jenkens nor Hunton has confirmed
those plans.
Jenkens' Internet site listed 128 attorneys
remaining Thursday, including 111 in Dallas.
A number of those have announced plans to join
other firms or start their own practices.
<< BACK
TO BUSINESS LITIGATION ARCHIVE