Sunday, July 6, 2014
BP Holdings Tax Management: 3 Tips For Tax Attys To Avoid Jail Time
Balley Price Holdings - Although it may be too late for Paul Daugerdas, the former Jenkens & Gilchrist PC boss who was sentenced to prison on Wednesday for orchestrating the largest known tax fraud scheme in American history, other attorneys can still take precautions to ensure they don't find the same fate.
Daugerdas was sentenced to serve 15 years in prison for his role as the mastermind behind the $7 billion scheme, which certified tax law specialist Sanford Millar said was clearly designed to be illegal.
"The simple axiom is 'don't be a crook,'" he told Law360. "What we had is clearly criminal conduct on the part of Daugerdas, who is not only cheating the Internal Revenue Service but is also cheating his partners. The guy was just a bad man, so when you begin with the premise that people are willing to engage in criminal conduct, there's nothing that needs to be stated besides 'don't be a crook,' other than 'don’t get caught.'"
Prosecutors say Daugerdas created and implemented four tax shelters for wealthy clients that resulted in over $7 billion worth of fraudulent tax deductions or benefits. He personally reaped $95 million from the scheme, according to the government.
In addition to the prison time, U.S. District Judge William Pauley III also ordered Daugerdas to pay $164.7 million in forfeiture and $371 million in restitution. Prosecutors had requested a punishment of at least 20 years in prison, while Daugerdas argued he should serve no more than 30 months.
Daugerdas began his career at accounting firm Arthur Andersen LLP in 1975. He worked there as a tax partner until 1994, when he was forced to resign amid concerns that he had secretly diverted hundreds of thousands of dollars in fees to himself, prosecutors said.
Whether you're running an office like Daugerdas or just learning the ropes as a summer associate, lawyers and professors told Law360 that tax attorneys can take some simple precautions to help avoid trouble.
o Mind Your Fee Structure
In tort cases, it is common for attorneys to bill their clients based on how much money they are able to recover. For tax help, however, the arrangement might occur a bit too often.
"There's all this talk of moving away from the hourly fee," said Robert Rosen, who teaches professional responsibility at the University of Miami School of Law. "In these arrangements, Jenkens was paid a percentage of the profits made by the client. That aligns the incentives of the client with the incentives of Jenkens."
The problem with that alignment is that it leads to a lack of independence, Rosen says, which opens the door for a potentially illegal decision.
But regardless of fee, Millar says that a lawyer with a specific tax scheme needs to find some ethical way to cover the research and development costs.
"Contingencies themselves are not inherently evil," said Millar, who practices in Los Angeles. "The question is whether they're reasonable. To state that one species of contingency fee is evil and the other isn't is an academic exercise."
o Don't Bank on Reputation
Back in the 1970s and 1980s, tax shelters were very crude, said Brooklyn Law School professor Steven Dean, who used to practice at Debevoise & Plimpton LLP. Much has changed from the days of a few doctors buying a hotel at an inflated price for the tax break.
"It was very silly in a way, very '70s. The recent tax shelters like this one, you have Nobel Prize winners and big, fancy law firms that are involved in these transactions, and they still lose," he said. "I think there was a time when people had enough degrees or had a plush enough office, they couldn't lose."
Dean said that times have changed, largely because the courts hear these cases with an increased level of skepticism. Judges no longer take a taxpayer's word for granted, so the taxpayer's lawyer shouldn't either.
"Here we have a very fancy, pedigreed taxpayers and lawyers involved in a transaction that turns out to be categorized as a tax shelter," Dean said. "The key takeaway from this recent wave of tax shelters is that pedigree is no defense."
o Beware the Black Box
In a black box agreement, the client agrees to keep any dealings with the lawyer confidential, turning the one-way confidentiality agreement between attorney and client into a bilateral deal.
"One thing a professional should know is that any remedy where you can't describe how it works is dangerous," Rosen said. "A young attorney who sees that's what their bosses are doing, that should be a marker that something is going on. There are no secret ways to engage in tax savings except ones that are questionable, and that's what went on during this period at Jenkens."
In and of itself, a confidentiality agreement can be suggestive of a conspiracy, Millar said.
"I would counsel against those devices," he said. "They not only have the optics to be terrible, but if sought to be enforced would prove to be unenforceable and conceivably the subject of an uncovered malpractice claim, being an intentional act to engage in a conspiracy to commit a crime."