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The Department of Justice has expanded its crackdown on attorneys who promote allegedly illegal tax shelters with a civil injunction complaint against two Southern California lawyers.

The complaint, filed in federal court in New Jersey on Feb. 22, alleges that Charles Klink and Caleb Grodsky concocted an intermediary transaction tax scheme designed to help them avoid paying corporate taxes on capital gain income generated from the sale of their clients’ business assets. The Justice Department also sued Steven Block, a financial professional in Louisville, Ky.

According to the complaint, the trio illegally deducted $112 million of distressed consumer receivables, such as Brazilian retail debt, as bad debt on federal tax returns. The scheme caused more than $40 million in tax losses, according to the complaint.

"Stopping the marketing and use of abusive tax shelters remains one of our top priorities for 2011," said John DiCicco, acting assistant attorney general in the Justice Department’s tax division. "White-collar professionals who promote these schemes face the prospect of significant legal sanctions."

The three defendants allegedly obtained the tax shelters from John Rogers, a former Chicago partner at Seyfarth Shaw who was sued in November by the Justice Department for allegedly creating more than $370 million in fake tax deductions for U.S. clients using Brazilian debt. Rogers had been a partner at Seyfarth Shaw since 2003. Upon discovering that he was selling tax shelters and was under investigation by the Internal Revenue Service, the firm forced him to resign in 2008.

Rogers, who is representing himself, has sought to dismiss the complaint against him.

Grodsky, of the Grodsky Law Firm in Los Angeles, is a 1996 graduate of Pepperdine University School of Law. He started his career at the now defunct Battle Fowler and in 2000 joined Manatt, Phelps & Phillips, where he met Klink and worked in the corporate securities department, according to the complaint. He left Manatt in 2001, according to Manatt spokesman Lawrence Martinez.

Klink, of Klink & Associates Inc. in Fontana, Calif., was an associate at Brown & Wood, now Sidley Austin, from 1992 to 1996 and from 1997 and 1999. In 1999, he joined Manatt, where he became a partner in the corporate and securities law practice in 2001. He founded his own firm after leaving Manatt in 2003. He is a 1992 graduate of the University of California at Los Angeles School of Law, according to the complaint.

Both have been licensed to practice law in California since 1997. The activities alleged in the complaint took place during the past decade and relate to when both had their own law firms. Neither returned calls for comment.

Block, who worked at Merrill Lynch during the 1980s, formed his own consulting firm in 2004.

According to the complaint, the trio began the alleged scheme during the late 1990s. They promoted the transactions through Acquisitions Strategies International Inc., a Nevada financial advisory firm that Klink and Block co-owned and for which Grodsky worked as an associate counsel. Klink served as general counsel.

The defendants purchased all the stock in a client’s corporation using bridge loans, the complaint continued. Then, they would tell the client that they would restructure the entity into a profitable business that would pay federal income taxes on the capital gains from an asset sale. But instead of paying those taxes, the three allegedly implemented a distressed asset trust tax shelter and claimed deductions for "sham fees" that offset most or all of the capital gains. They also cleared out the assets so that the corporations had nothing left with which to pay back taxes.

To conceal their activities, the trio allegedly used trusts and corporations to serve as intermediaries with their customers in the asset deals, which include the sale of a $205 million office building in Washington and the $3.5 million sale of the Indian Creek Vineyards in St. Helena, Calif.

Justice Department lawyers also said the three defendants lied about the details of the transactions to attorneys for their customers at Los Angeles-based Sheppard Mullin Richter & Hampton, New York’s Loeb Block & Partners, Kutak Rock of Omaha, Neb., and Locke Liddell & Sapp, which is now Locke Lord Bissell & Liddell.

Contact Amanda Bronstad at [email protected].

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