More on Jenkins & Gilchrist Shelters--attorney liable in connection with tax opinion

The Fifth Circuit upheld an attorney's liability to an investor for his opinion in connection with the investor's entering into a Jenkens & Gilchrist/ Bank One digital options tax shelter for generating artifical losses, but reversed the district court's RICO award of $6.43 milllion to the investor.  Ducote Jax Holdings LLC v. Bradley, No. 08-30037 (5th Cir. Jun 19, 2009) (unpublished decision). 

The court confirmed that the attorney, Bradley, was liable under RICO and various state law claims for negligent representation, fraud, civil conspiracy and breach of fiduciary duty.  The attorney admitted that he spent very little time on the project, though he got paid $25,000 (ultimately by the promoters).  Lesson here--don't think you can get something for nothing--i.e.,  don't give an opinion when you really don't do any work on which to base the opinion.

The complaint alleged that the investor (various Ducote enterprises) had been induced to participate in the tax strategy by documents with misleading representations, including that the IRS wouldn't assess any peanlties.  The investor claimed "extensive monetary damages consisting of unexpected tax liability, fees and commissions paid to the Bank One Enterprise, as well as interest and penalties which the [IRS] will likely seek."  Id. at 2.  Ultimately, the investor was subject to a tax assessment of $3.14 million, a penalty of $315,000, and interest of $500,000, after paying fees to Jenkens & Gilchrist and Bank One of more than $1 million.  Attorneys fees for the litigation were about $650,000.  In other words, they were out about $5 million for fees and taxes.  (But the taxes were due anyway.)

The investors had gotten about $2.85 million in a settlement with the defendants.  The district court found the attorney liable and awarded about $5 million in damages (which included the $3 million in taxes assessed against the investors), minus the settlement amount paid, yielding about $2.14 million.  That figure was then trebled under RICO. 

Bradley contested the damages, claiming he didn't cause the tax liability.  The investors countered by claiming that if they had been informed about the problems with the tax shelter they used, they "would have employed another tax management or deferral strategy and therefore would not have incurred a tax liability of over three million dollars" but never really explained how they would have been able to do so, according to the 5th Cir. opinion.  The court said the appropriate damage measure would be the difference between the amount of money the investors had to pay the IRS versus the amount they would have paid if the attorneys had advised them correctly.  Id. at 14.  Accordingly, the court subtracted the tax assessment from the damage award (prior to trebling), leaving no damages from the violation.

Comments

[darms]

So the investor paid over $1M to evade taxes of only $3.14M? Do you know what the initial sum the investor was trying to evade taxation on? My guess is compared to the total sum involved, the <$2.14M the investor 'saved' looks like "chump change".

[LindaMBeale]

I haven't looked at anything beyond the opinion I blogged on this one to see the details. But I don't think this is so far off base from some of the other shelter deals--paying $1M instead of $3M is $2M in the taxpayer's pocket, which seems to be the bottom line determination being made. Essentially, the promoters are getting a bite of the taxpayer's tax savings for designing and implementing the deal.

[darms]

For me it's a question of perspective. If this was a capital-gains transaction taxed at 15% then the total amount involved was about $21M. Saving $2.1M via a dodgy tax shelter meant the investor kept ~$20M instead of ~$18M. Now $2M is a lot of money, at least to me, but I see very little difference between $18M & $20M, either amount would support me & mine in luxury for the rest of our lives. Are the wealthy as cheap and as venal as the numbers above would suggest? Or am I being naive?

[LindaMBeale]

I'm afraid I have to conclude that at least some of the wealthy are as venal and cheap as these deals suggest.