Comments on: A Texas Style Meltdown

By: Mike Sikorsky

Mike Sikorsky — Mon, 02 Apr 2007 13:10:43 +0000

Any attorney should be frightened of this story and the potential repercussions. Jenkens’ plea is another masquerade that the DOJ/IRS is using in typical fashion to extort witness testimony against those which they have no case.

“It is estimated that Mr. Daugerdas earned nearly $19 million in fees per year (for a total of $93 million) for his work at Jenkens in creating these shelters and writing opinions about their validity, which proved to be false.” Oh really? Where is the evidence that they were ‘proved to be false’? After looking at these structures the only thing proven so far is that they were in fact valid until the IRS began an ex post facto campaign to cover its own inadequacies.

So why should the rest of us worry about this? Because this is a far-reaching investigation that involves hundreds of lawyers and accountants as well as many reputable firms. Does anybody really believe that all of these people collaborated and created a gigantic conspiracy to do something illegal? That would be astronomically unlikely. Making money is not a crime, unless you view it from the subjective perspective of the Department of ‘Justice’.

By: Someone with a bit more info

Someone with a bit more info — Sat, 31 Mar 2007 17:59:05 +0000

I’ve dealt with this issue in a direct manner, and have information not publicly disclosed. I can tell you that it is odd to deal with an issue affecting your clients, and then read about it in the WSJ the next day.

This work has given me a perspective about this entire issue. Like Kafka, what bothers me most about discussions about these tax shelters (or “tax strategies” as practitioners often refer to them) is that only one of these shelters has even arguably been found to be illegal by a court. However, That decision also admonished the IRS for attempting, in ex post facto fashion, to issue an IRS Notice and apply it to already-completed shelter transactions.

I am certainly not defending the law firms, accounting firms, financial institutions, or individual taxpayers (who are left out of much of negative attention) who attempted to shield millions upon millions of dollars from being taxed. However, I blame Congress (and possibly the IRS for not advocating stronger) for leaving these large loopholes in the tax code and then ham-handedly trying to fix the issue later. As a matter of fact, I believe the IRS has acted in a frightening fashion — attempting to call something illegal after the fact. I don’t have $20 million in income to shield, but I am a taxpayer that fears such power in the federal government being unquestioned.

As a instructive note, agreeing to “be subject to a $76 million penalty” does not mean that that J&G is actually *paying* $76 million in penalties. It is safe to infer that the actual settlement agreement on that issue (as opposed to the deferred prosecution agreement, which deals with criminal issues) will not be made public.

By: Kafka

Kafka — Fri, 30 Mar 2007 14:42:58 +0000

Congratulations DOJ, a victory is a victory even if it is a pyrrhic victory since J&G was going BK anyways and will unlikely be able to pay the fine. You have proved once again your perception of the law is reality though not necessarily the law. Luckily, in this matter, you did not receive the same type of scrutiny as the AG in the fired prosecutor mess. Who could withstand that type of scrutiny especially if the prosecutor firing mess is SOP at the DOJ. One must wonder however if the same type of duplicitous behavior did not occur with J&G as in the fired prosecutor mess. In fact, none of the J&G transactions have ever been legally determined to be tax shelters from even a civil perspective, let alone criminal. You certainly haves much power and an interesting interpretation of the tax law but one must wonder what type of internal deliberations you had regarding criminality. Though it is difficult to obtain public information on DOJ internal deliberations on these matters, the Stein case provides much insight. In the Stein case, dealing with KPMG tax shelters similar to the J&G transactions, the DOJ provided to the court an IRS memorandum portending to support the DOJ contention that the KPMG transactions were tax shelters. Yet on page 12 of such legal memorandum which was underlined by the DOJ, the IRS concludes the KPMG transactions were not tax shelters unless the investments were outstanding after year end (which the DOJ and IRS have consistently maintained none were). Further, in the Stein case regarding tax shelters, an email in early 2003 from the lead IRS lawyer on the case states that if KPMG litigates the issue of whether the transaction is a tax shelter, it is substantially likely KPMG would prevail and in the process create some bad law. Yet the DOJ recently obtained a declaration from the same IRS lawyer that there was no question that the KPMG transactions would be treated as tax shelters (sounds like Kyle Sampson). Even in the grand jury transcripts provided by the DOJ in the Stein case, light is shed on the methods of the DOJ in these matters. The DOJ interviewed two witnesses before the grand jury on the tax shelter issues and was able to persuade both witnesses to testify the KPMG transactions were tax shelters. The DOJ obtained this testimony even though such testimony was in direct conflict with the IRS rules described and underlined by the DOJ in the IRS memorandum concluding the transactions were not tax shelters. In any event, most likely, the J&G transactions were not tax shelters under the Internal Revenue Code even though the DOJ was able to persuade the 1/3 remaining at J&G otherwise. You have to give the DOJ credit, regardless of the law (fortunately, not every matter receives the same scrutiny as the AG firing of the prosecutors), the DOJ gets what it wants, companies have no other business choice than to proceed as J&G did.

By: University Update

University Update — Fri, 30 Mar 2007 14:21:22 +0000

A Texas Style Meltdown