Ay carumba! Tax shelters doom law firm

I was chatting with the Web's Tax Mama, Eva Rosenberg, this afternoon and one of our topics was questionable tax tactics.

Then I opened up my e-mail box and there was a release from the IRS on a $76 million penalty settlement agreement the IRS has reached with a Texas-based law firm for, quoting the IRS here, its "promotion of abusive and fraudulent tax shelters and violation of the tax law concerning tax shelter registration and maintenance."

As Eva had just noted not half an hour earlier, "You don't ever want an IRS press release with your name on it." At least not in this context.

The firm is Jenkens & Gilchrist, which in the wake of the nonprosecution agreement, is closing shop. That means the shuttering of offices, according to its Web site (which you can check out yourself here, but you probably better hurry before it is taken down), in Austin, Dallas, Houston and San Antonio. TaxProf has additional details on the firm, as well as links to news coverage of the tax deal.

You might not know the firm, but perhaps you've heard of some of the shelters they pitched to the ultra wealthy and which generated more than $1 billion in phony tax losses. They are some of the best acronyms, if not best tax maneuvers, in the business:

• 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
• BOSS, Bond & Option Sale Strategy
• HOMER, Hedge Option Monetization of Economic Remainders
• BART, Basis Adjustment Remainder Trusts

Guess lotsa folks are now saying, D'oh!

And that group includes more than J&G lawyers and staff. 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.

Seeking appropriate shelter: In case, as the April 17 tax due date nears, you're looking for some ways to trim your tax bill, remember that old cliché: If it's too good to be true, it probably is. That goes double when it comes to tax techniques.

And if your 2006 bill has you contemplating ways to dramatically reduce it next year, check out this story on how to avoid buying an abusive tax shelter. And this item on picking a tax professional who won't steer you down the wrong, and very costly, path.

The Simpsons File: You can check out the instances where Bart uttered "ay carumba" or Homer had a head-slapping "D'oh!" moment, along with other episode factoids on everybody's favorite Springfield family, here.

Comments

[Kafka]

Congratulations DOJ, a victory is a victory even if it is a pyrrhic victory since J&G was going BK anyways and will unlikely be able to pay the fine. You have proved once again your perception of the law is reality though not necessarily the law. Luckily, in this matter, you did not receive the same type of scrutiny as the AG in the fired prosecutor mess. Who could withstand that type of scrutiny especially if the prosecutor firing mess is SOP at the DOJ. One must wonder however if the same type of duplicitous behavior did not occur with J&G as in the fired prosecutor mess. In fact, none of the J&G transactions have ever been legally determined to be tax shelters from even a civil perspective, let alone criminal. You certainly haves much power and an interesting interpretation of the tax law but one must wonder what type of internal deliberations you had regarding criminality. Though it is difficult to obtain public information on DOJ internal deliberations on these matters, the Stein case provides much insight. In the Stein case, dealing with KPMG tax shelters similar to the J&G transactions, the DOJ provided to the court an IRS memorandum portending to support the DOJ contention that the KPMG transactions were tax shelters. Yet on page 12 of such legal memorandum which was underlined by the DOJ, the IRS concludes the KPMG transactions were not tax shelters unless the investments were outstanding after year end (which the DOJ and IRS have consistently maintained none were). Further, in the Stein case regarding tax shelters, an email in early 2003 from the lead IRS lawyer on the case states that if KPMG litigates the issue of whether the transaction is a tax shelter, it is substantially likely KPMG would prevail and in the process create some bad law. Yet the DOJ recently obtained a declaration from the same IRS lawyer that there was no question that the KPMG transactions would be treated as tax shelters (sounds like Kyle Sampson). Even in the grand jury transcripts provided by the DOJ in the Stein case, light is shed on the methods of the DOJ in these matters. The DOJ interviewed two witnesses before the grand jury on the tax shelter issues and was able to persuade both witnesses to testify the KPMG transactions were tax shelters. The DOJ obtained this testimony even though such testimony was in direct conflict with the IRS rules described and underlined by the DOJ in the IRS memorandum concluding the transactions were not tax shelters. In any event, most likely, the J&G transactions were not tax shelters under the Internal Revenue Code even though the DOJ was able to persuade the 1/3 remaining at J&G otherwise. You have to give the DOJ credit, regardless of the law (fortunately, not every matter receives the same scrutiny as the AG firing of the prosecutors), the DOJ gets what it wants, companies have no other business choice than to proceed as J&G did.