A real estate development company and its related businesses have sued Akin Gump Strauss Hauer & Feld, accounting firm Grant Thornton and Grant Thornton tax partner Jamie Fowler in a Dallas state district court. The plaintiffs allege that following the defendants’ advice—not to settle a considerable tax bill with the Internal Revenue Service and New York state—cost them $12 million in actual damages.
“We find the allegations without merit and intend to vigorously defend ourselves,” Grant Thornton spokeswoman Michele Mazur said in an email.
According to J.A. Green Development Corp. v. Grant Thornton,filed in the 14th District Court on Jan. 14, plaintiffs J.A. Green Development Corp and its associated entities in 1998 sold their warehouse/office properties located near New York’s John F. Kennedy International Airport. Two years later, an accounting firm—one that is not a defendant in the lawsuit—promoted a “proprietary” tax-reducing investment strategy that used a “distressed debt strategy” promising to make the plaintiffs a significant profit and legally reduce their tax liability resulting from the sale of the properties, according to the petition.
In 2003, the IRS audited the plaintiffs’ 2001 federal tax return and New York state audited their state return, requiring them to file amended returns. The plaintiffs hired Akin Gump to represent them in the audits. In 2005, the plaintiffs terminated their original accounting firm and hired Grant Thornton and Fowler to represent them in the audits as well.
From 2005 until 2009, defendants Akin Gump, Grant Thornton and Fowler “repeatedly instructed the plaintiffs not to settle these disputes and instead fight the IRS because the tax position was strong and ultimately plaintiffs would prevail … or, at a minimum, the IRS would offer to settle on very favorable terms because of the strength of the tax position, which would result in the IRS allowing a substantial portion of the tax saving generated by the tax strategy,” according to the petition.
In 2005, the IRS and the state of New York offered to settle with the plaintiffs if they paid all back taxes owed with interest. The defendants “instructed” the plaintiffs “to reject the offer because the distressed debt strategy was a legal transaction, plaintiffs’ tax position was very strong, and plaintiffs would prevail in these disputes. To add fuel to the fire, defendants instructed plaintiffs that no payments should be made to stop interest from accruing because it was contrary to the position defendants were taking for plaintiffs in the audit,” the petition claims.
The IRS began aggressively prosecuting the plaintiffs’ audit in 2006. In 2008, Fowler and Akin Gump partner Don Alexander, who died in 2009, held a conference call after the IRS issued a 30-day notice that it was disallowing the plaintiffs’ loss in full, assessing interest on the tax owed, imposing a 40 percent penalty and interest on the penalty, and disallowing the deduction of all fees. Fowler’s statements to the plaintiffs at that time indicated that she was “no longer confident” in her advice, and Alexander expressed the same position, according to the petition.
After Alexander died in February 2009, Akin Gump advised the plaintiffs that it did not have another lawyer to assign to its IRS dispute, according to the petition.
The plaintiffs later hired Winston Strawn to represent them. On the advice of that law firm and that of Grant Thornton, the plaintiffs made their first payments on their tax bills to stop interest from accruing, the petition states.
“Had defendants completed due diligence, these defendants would have determined that the distressed debt strategy was an illegal and abusive tax shelter that the IRS and/or court would disallow and assess back-taxes, penalties, and interest against plaintiffs. As a result of the defendants’ improper advice and instructions, plaintiffs have suffered substantial damages—in excess of approximately $12,000,000,” according to the petition, which alleges gross negligence as a cause of action.
David Deary, a partner in Dallas’ Loewinsohn Flegle Deary who represents the plaintiffs, did not return a call for comment.
Neither J. Kenneth Menges Jr., the partner-in-charge of Akin Gump’s Dallas office, nor Fowler returned calls for comment.