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The Internal Revenue Service has filed enforcement suits against Jenkens & Gilchrist and Sidley Austin Brown & Wood to force both firms to reveal the names of clients who allegedly received tax-shelter advice. Jenkens & Gilchrist is fighting the enforcement suit, claiming attorney-client privilege, and only recently agreed to provide names and responsive documents about tax clients the IRS already knows about. But Sidley responded differently, turning over the identities of all of its tax-shelter clients except for those who objected to it. That has forced about 48 Sidley clients to hire lawyers from eight firms, including two in Texas, to attempt to intervene in the federal enforcement suit the government filed against Sidley. U.S. District Judge Matthew Kennelly of Chicago says he will decide on Thursday whether the 48 former Sidley tax clients can intervene in United States of America v. Sidley Austin Brown & Wood, the suit the government filed in the Northern District of Illinois in December 2003 to enforce the John Doe summons filed against Sidley in October 2003. William F. Conlon, a partner in Sidley who is working on the enforcement suit, says the firm provided indentities of clients, but no other attorney-client material unless a client instructed the firm to do so. The judge already has rejected some of the arguments for intervention presented by lawyers representing the Sidley clients in the enforcement suit, but is considering others. The enforcement action against Sidley could put attorney-client privilege to a test. “I really am very concerned that it is putting a big dent in attorney-client privilege,” says George Connelly, a Houston lawyer who represents two of the “John Doe” clients who do not want Sidley to reveal their identities to the IRS. But Michael Saltzman, a partner in White & Case in New York who also represents intervenors, says “the damage has already been done” to attorney-client privilege with United States v. BDO Seidman, a 2003 7th U.S. Circuit Court of Appeals ruling that found a group of former clients of an accounting firm did not have the right to intervene in a similar enforcement suit. The appeals court rejected their argument that their identities were protected from disclosure by a statutory tax practitioner/taxpayer privilege created by 26 U.S.C. � 7525. At a hearing on April 2, Kennelly rejected an argument that the 48 former Sidley tax clients have the right to intervene under Rule 24(a) of the Federal Rules of Civil Procedure. In that ruling, Kennelly applied Seidman. Kennelly said at that hearing that he is not persuaded that the distinction between the attorney-client privilege and a statutory tax practitioner privilege matters. “[F]or all practical purposes, the 7th Circuit’s decision in the Seidman case speaks as much to the scope of the attorney-client privilege as it does to the taxpayer privilege,” Kennelly said, according to a transcript. Saltzman and Connelly argue otherwise. “I view this case as different in that it is a direct involvement of a lawyer-client communication,” Saltzman says. Jasper “Jack” Taylor, a partner in Fulbright & Jaworski in Houston who also represents some John Doe clients, declines comment. Kennelly, meanwhile, reserved until Thursday his decision whether they are permitted to intervene under Rule 24(b), which would allow the Sidley clients to challenge whether their identities are within the scope of the summons. Connelly, a shareholder in Chamberlain, Hrdlicka, White, Williams & Martin, says the summons described clients who invested in a certain type of deal “and we aren’t that type of person.” The summons, issued in October 2003, asks Sidley to disclose the identities of U.S. taxpayers who participated in a “listed transaction” or other “potentially abusive tax shelter” organized or sold by Sidley or its predecessor firm Brown & Wood from Jan. 1, 1996, through Oct. 15, 2003. (Sidley & Austin and Brown & Wood merged in 2001.) But in an agreed order Kennelly signed on Feb. 6, the firm agreed to disclose to the government the identities of non-objecting participants in transactions that became listed transactions or potentially abusive tax shelters for which Sidley or Brown & Wood was paid a fee. The order also gave former Sidley clients who do not want their identities revealed to the IRS the opportunity to file a motion to intervene, which is what 48 have done. Saltzman says John Doe summons are unusual, but “this has to be viewed in the context of this rather aggressive stance that now the IRS and the Justice Department are taking with regard to tax shelters.” The enforcement action against Jenkens is proceeding down a different route. On March 25, U.S. District Judge James B. Moran of Chicago signed an order in United States of America v. Jenkens & Gilchrist requiring Jenkens and the government to give him in camera lists of all the Jenkens tax clients each side believes would be responsive to summonses the IRS issued against Jenkens in 2003. According to the order, Moran says he will compare the lists to determine the identities of the Jenkens clients already identified by the government. Thomas Borders, a partner in Chicago’s McDermott, Will & Emery who represents Jenkens in the enforcement suit, says the firm believes the IRS already knows the identity of many of its tax clients, so attorney-client identity privilege would not be an issue. “The court is reviewing lists submitted by Jenkens and the government to determine situations where identity privilege doesn’t exist,” Borders says. He declines to say how many names are on the list the firm submitted to Judge Moran, but the six summonses the government issued in August 2003 against Jenkens sought 607 names. Calls to John A. Lindquist III, a DOJ tax division attorney in Washington, D.C., who is prosecuting both enforcement actions, were referred to a DOJ spokesman, who declines to comment. Connelly says his John Doe clients are disappointed with Sidley. “They thought they had a relationship, an expectation [with Sidley],” he says. FEDERAL INVESTIGATION The summonses against Jenkens and Sidley relate to a federal investigation into alleged tax shelters. On the civil side, both firms are defendants in class action litigation filed by disgruntled tax-advice clients, but Jenkens and lawyers representing plaintiffs in the litigation have reached a proposed $75 million settlement. A federal judge in New York must certify a class of plaintiffs and approve the proposed settlement, which calls for the firm to contribute $5.25 million to the pot. Charles Herring Jr., a partner in Austin’s Herring & Irwin who is knowledgeable about professional responsibility, says lawyers usually err on the side of caution in breaking privilege because they don’t want to unwittingly, or without the client’s consent, provide information the client may think is protected by the attorney-client privilege. “It is fairly common for law firms to resist any request for any information about clients, even names, particularly when it’s a government investigation … until they at least allow the client the opportunity to analyze the issues,” Herring says. In the Sidley suit, Kennelly said at the hearing on April 2 that a number of the intervenors argue in motions that their identities are not within the scope of the summons against Sidley because they did not consult the firm for “organized or sold transactions.” But because the firm is not making that argument, Kennelly said, according to the transcript, “there’s at least a decent argument for the proposition that without permitting the intervenors to intervene, a potential defense may go unmentioned in the case. “ Connelly says his clients and other intervenors don’t believe they are subject to the summons. “We’re contending Sidley is not an organizer or seller of our investment. No. 2, we are saying we don’t believe our investment is one of these covered by these very vague descriptions of the IRS problems,” he says. “What Sidley is saying, in so many words, is we are not admitting any wrongdoing here, but we are not going to challenge your right to this information in this proceeding,” he says.

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