On May 24, 2011, several attorneys from now-defunct law firm Jenkins & Gilchrist and a former executive of BDO Seidman, LLP were convicted in the United States District Court for the Southern District of New York for their roles in developing, promoting, marketing and implementing fraudulent tax shelters, and drawing unwanted attention from New York securities lawyers in the process. A press release (link below) from the United States Attorney for the Southern District of New York stated that the convicted individuals made profits of approximately $130 million over ten years with the fraudulent tax shelters. The Department of Justice worked with the Internal Revenue Service (IRS) to investigate and prosecute the action.
Federal prosecutors had alleged that the tax shelters at issue generated more than $1 billion in false tax losses for high net worth individuals.
Tax shelters are generally understood to be schemes that reduce one’s tax liability, and are not necessarily illegal. In fact, it is entirely within one’s rights to minimize their tax liability, albeit legally. The development of tax shelters that skirted and sometimes flagrantly flouted the United States Tax Code occurred mainly in the late 1990s and early 2000s and have led to convictions of professionals from some of the Country’s most well-respected law firms, and the world’s largest banks and accounting firms.
Law firms were often involved in the tax shelter schemes, and helped with development and marketing of the shelters, and often provided investors with a legal opinion that was claimed to provide the investor with legal protection from individual responsibility for assessment of penalties, interest and sanctions if the IRS did audit the transactions. With varying success, the IRS has prosecuted high net worth individuals who invested in the tax shelter schemes by alleging that those legal opinions did not shield the investors from penalties, interest and sanctions because of the law firms’ role as “promoters” of the tax shelters. Essentially, the IRS claimed that the law firms did not represent the individual investors and instead churned out legal opinions as part of the scheme.
Investors in these fraudulent tax shelters may have actionable claims for fraud, breach of fiduciary duty and breach of contract against the involved banks, accountants and law firms. Often, a claim for fraud will lie where any of the involved professionals made misrepresentations to the investor regarding the tax shelter transaction. A claim for breach of fiduciary duty may exist where certain duties, owed by fiduciaries such as accountants or lawyers, were not strictly adhered to.
U.S. Attorney for the Southern District of New York’s Press Release