Tax Shelter Client List Could be Double What IRS Had Suspected

Settlement papers filed as part of a class-action suit show that the number of clients steered toward illegal tax shelters by Dallas law firm Jenkens & Gilchrist is more like 1,100—nearly double the number previously cited by the Internal Revenue Service, the New York Times reported. The IRS is seeking the list of names of those who participated.

The papers say that from 1999 through 2003, Jenkens & Gilchrist "issued opinion letters to over 1,100 clients who reside in 41 states," the Times reported, citing court documents.

The opinion letters show that the firm told clients that the shelters were likely to hold up under IRS scrutiny. When the IRS declared them to be questionable or bogus, the people who invested in them were left owing millions of dollars to the government, the Times reported.

The proposed $75 million settlement was reached in March between Jenkens & Gilchrist and lawyers representing around 100 plaintiffs, the Times reported.

"Suffice it to say there's hundreds of millions of dollars in fees paid to people, and that doesn't include penalties" levied by the IRS, said attorney David Deary, whose firm represents about 100 of the class-action plaintiffs, at the time of the settlement. He told the Fort Worth Star-Telegram that all his clients are individuals "who had sold a business or had a large capital gain" and were told that they could shelter their gains from federal income taxes using six or seven different strategies.

"The bottom line is, the IRS's position is that none of these strategies had a business or economic purpose," but rather were purely designed to avoid taxes, Deary said in March. The Dallas Business Journal reported in March that Deary’s firm is also pursuing legal action against Wachovia Corp./First Union Corp., Ernst & Young LLP, KPMG LLP and others over the allegedly faulty tax strategies.

Jenkens & Gilchrist Chairman Tom Cantrill said in a prepared statement at the time of the settlement that "we continue to believe the legal advice provided to our clients accurately reflected the state of the tax laws at the time it was provided." He said the firm is confident that it "will also be able to resolve all outstanding issues such as the government's demand for privileged information."

William M. Parrish, a partner with Jenkins & Gilchrist in Austin, TX, told the Times this week that the 1,100 figure "covers anyone who is a potential taxpayer," and that one opinion letter could have covered more than one person and/or entity.

Deary told the Times that the agreement was the best alternative for investors. He said that Jenkens & Gilchrist's insurers had indicated they would try to refuse paying coverage if the deal was successfully contested. A federal judge is set to review the deal this month.

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