Back in March 2007, I noted the disbanding of Jenkens & Gilchrist after the firm settled tax fraud charges that had been under investigation since 2003, with a payment of $76 million. See Jenkens & Gilchrist: Settlement and Disbanding of Firm, Mar. 29, 2007. These were option shelters, like the Boss and Son-of-Boss shelters still in the news. Then in 2008, I noted the guilty plea of Douglas Steger, the head of American Financial Capital Corporation that promoted tax shelters with Jenkens & Gilcrhist's Paul Daugerdas and others. See Banks, Law Firms, CPAs--everybody wanted the money from tax shelters, July 10, 2008. Steger agreed to cooperate, which suggested either more guilty please or indictments would be forthcoming. Last week, Former BDO Seidman vice chair Charles Bee pled guilty to similar charges, as did BDO former members Michael Kerekes and Adrian Dicker earlier in the year. Today seven more lawyers, bankers and accountants were indicted in connection with these shelters. Download Daugerdas et al Press Release, Download Daugerdas et al Indictment.
Today's indictment charges the seven individuals--three from J&G, 2 from BDO Seidman, and 2 from foreign "Bank A" with headquarters in New York--with 27 counts of tax evasion, tax fraud conspiracy and impeding and impairing the lawful function of the IRS over a decade from 1994 through 2004. They are Paul Daugerdas (former head of J&G's Chicago office), Erwin Mayer (former shareholder in J&G's Chicago tax practice), Donna Guerin (former shareholder in J&G's chicago tax practice), Denis Field (former CEO and board chair at BDO Seidman and former tax practice head), Robert Greisman (former tax partner at BDO), Raymond Brubaker (former investment rep at Bank A in Dallas--presumably Deutsche Bank, see this tidbit on Brubaker and other former Deutsche employees establishment of Bluffview Securities), and David Parse (former investment rep at Bank A in Chicago). Many of these people had LLM degrees in taxation and were CPAs as well. They clearly knew what they were doing--at BDO, they first called their group the "tax sales executive group" before tampering it down to "tax solutions group" in 1999. They charged fees "far in excess" of their normal billing rates for these deals, according to the inictment.
The various option shelters (SOS, HOMER, Short Sales) generated about $7.5 billion in artifical tax losses for hundreds of wealthy individuals. Several of the indicted group used the tax shelters for themselves, for which they got "free" opinion letters from J&G. Each of the conspiracy charges could land a defendant in jail for 5 years, with 3 years' supervised release and a fine of the greatest of $250,000, twice the gross gain to the defendant, or twice teh IRS loss (as well as costs of prosecution). Add an additional 3 years in jail, 1 year supervision, and the same fine on the charges of corruptly endeavoring to impede the tax laws. As IRS Commissioner Shulman states int he release, "In today's economic environment, it's more important than ever that the American people feel confident that everyone is playing by the rules and paying the taxes they owe."
There are two big problems with these tax shelters: tax laywers who have lost their ethical guidestar, and banks that have seen serving as accommodation parties in shelters as just one more lucrative gig, the public be damned.
Too many tax lawyers have followed the money for too long--they've lost sight of their obligation as officers of the court to uphold the law, and put service to their clients (and their pocketbooks) above everything else. That will require toughening of standards and loosening of some of the protections provided currently by evidentiary privileges. Tax returns are like confessions--the taxpayer is supposed to "fess up" to all income and pay appropriate tax. I am convinced that attorney-client privilege (or the somewhat less broad section 7525 tax-practitioner privilege) in respect of planning and justification of transaction reporting positions is unjustifiable. Similarly, work product protection should not be available to documents or materials that form the basis of information reported on returns, including tax accrual workpapers. The courts don't get work product right--they are extending it, rather than retaining it as a litigation-based doctrine. So Congress should step in and legislate, in clear language, that opinion letters and other materials related to positions on a tax return are disclosable and not protected by either evidentiary privilege.
Worth noting in addition is the role of big banks in promoting these strategies. Brubaker's bank worked with J&G to structure and implement the shelters. The indictment also mentions national "Bank B" that had its principal office in Chicago and arranged estate planning and tax shelter strategies for wealthy individuals, include the HOMER deals. (This is presumablly the former Bank One, since acquired by JPMorgan Chase, at which John Ohle worked in the "innovative stragies group" and promoted shelters like HOMER. Ohle was indicted last November for his tax shelter role--and apparently didn't bother to note that to his malpractice insurance carrier. See Insurer Sues Indicted Lawyer, Chicago Law, June 9, 2009.) So why have we not yet instituted tough regulations on derivatives? Isn't the bailout from the credit crunch (domestic and foreign banks that weren't direct recipients also benefitted, as they were often counterparties to AIG on credit default swaps or other transactions that paid out when the US funneled money to AIG) and the avarice represented by the participation in the planning and promotion of tax shelters enough to make clear the need to regulate Big Finance? I'm waiting for Congress to act, but I am worried. Both Senator Dick Durbin (D-IL) (responding to the failure of Congress to enact the most obvious and likely most beneficial remedy to the pain hitting Americans in the credit crisis--the ability of homeowners to modify their mortgage loans in bankruptcy) and Representative Collin Peterson (in response to the failure of Congress to enact meaningful measures to cut banks and their use of speculative derivatives down to size) have suggested that the "banks run the place". See In Crisis, Banks Dig In to Resist New Limits on Derivatives, New York Times, May 31, 2009 (noting the lobbying heft of JPMorgan Chase and others regarding banking and derivatives regulation).
These events make me wonder whether we can ever have decent legislation--on the financial system, on taxes, or on health care--while Big Banks and Big Pharm wield so much power.