In recent months the government’s tax shelter team has been working overtime. First, the firms that were the most active in helping to push abusive tax products � Sidley Austin and the now-defunct Jenkens & Gilchrist � settled with the government. They agreed to pay big fines but avoided criminal charges. Soon after, four current and former Ernst & Young LLP tax professionals were indicted for allegedly promoting fraudulent tax shelters.
But the nail-biting isn’t over for law firms that dallied in the shady world of tax shelters. The E&Y indictment, filed by the U.S. attorney for the Southern District of New York, shows how other law firms allegedly succumbed to the lure of easy profits. The indictment repeatedly mentions five law firms that allegedly gave fraudulent opinion letters to E&Y clients. In some cases, they even helped design tax shelters.
The indictment specifically names Jenkens and refers to the others as Law Firms A, B, C and D. According to lawyers familiar with the case and information from civil cases brought by disgruntled customers who bought the tax products at issue, the unnamed firms are Locke Liddell & Sapp (Law Firm A), Sidley (B), Arnold & Porter (C) and Proskauer Rose (D).
At Proskauer, the fallout from tax shelter work might already have taken a toll within the firm’s management. Ira Akselrad, an executive committee member who worked on tax shelters, left the firm last year.
According to the indictment, Proskauer and Arnold & Porter charged $50,000-$100,000 for an opinion letter for a shelter and, between the two firms, sold opinions to 150 people in 96 transactions. Total fees for the two firms could range from $7.5 million to $15 million. Locke Liddell charged $50,000-$75,000 per opinion and Sidley up to $150,000 per letter.
In addition to those transactions, the E&Y defendants face charges relating to E&Y’s sale of its consulting business to Capgemini in 2000. According to the indictment, firm D (i.e., Proskauer) created a vehicle called Tradehill to help 11 Ernst & Young partners reduce their tax liability from the sale. As part of that transaction, Proskauer allegedly issued a backdated opinion letter that included false statements. The government claims that Proskauer’s opinion was intended to deceive the Internal Revenue Service into believing that the E&Y partners executed the Tradehill transaction for investment reasons, rather than tax reasons. The indictment also alleges that the opinion purported to include all pertinent facts, but it did not. This shelter eliminated approximately $3.7 million of the partners’ taxes.
When the IRS audited the E&Y partners’ returns, Proskauer represented them and gave the IRS false and misleading statements, the government claims. (The indictment doesn’t say how much Proskauer was paid for the Tradehill work.)
The indictment does not describe Akselrad’s role in these shelters. The former Proskauer executive committee member was one of the partners who handled tax work for Ernst & Young, and he was experienced in shelter transactions. One person familiar with the E&Y case says he worked on the Tradehill deal. Akselrad worked with former Sidley partner R.J. Ruble to develop and market tax shelters for Diversified Group Inc., one of the most notorious shelter promoters, according to government filings in unrelated tax litigation in Massachusetts federal court. (DGI also used the services of Paul Daugerdas of Jenkens.) Ruble was expelled from Sidley in 2003 and indicted in 2005. To date he is the only major law firm partner indicted for tax shelter work.
In addition to scrutiny from prosecutors, these firms have been dealing with civil suits brought by hundreds of taxpayers who got into trouble with the IRS for participating in these shelters. Many of these have settled, but others are still active.
Last May, Akselrad left Proskauer to become executive vice president of U.S. Realty Advisors LLC, a company that structures complex tax-motivated deals involving commercial real estate. According to a securities filing by DVL Inc., where Akselrad is a director, he is also executive vice president and general counsel of The Johnson Company Inc., the private investment company of the Robert Wood Johnson IV family. (Akselrad represented Johnson when he bought the New York Jets in 1999.)
When asked to comment, Arnold & Porter offered a statement: “While the investigation is ongoing, we are unable to answer any questions. It is the firm’s policy to cooperate fully and voluntarily with any government investigation.” Proskauer and Sidley decline to comment; Locke Liddell and Akselrad did not return calls.
The government’s investigation is continuing. Regardless of the outcome, these firms likely wish they’d never taken a walk on the dark side of the tax world.
Susan Beck is a senior writer for The American Lawyer , a Texas Lawyer affiliate.