Jenkens & Gilchrist Bites The Dust

By Erin Coe

Law360, New York (March 29, 2007) -- After a costly tax shelter scandal wreaked havoc on Jenkens & Gilchrist’s reputation and finances, the once thriving national law firm has officially called it quits.

Jenkens plans to shutter its main office in Dallas at the end of the month and pay a $75 million penalty to the Internal Revenue Service as part of a tax shelter settlement, according to the IRS and the U.S. Attorney’s Office for the Southern District of New York on Thursday.

The firm has also entered into a non-prosecution deal with the U.S. Attorney for criminal tax violations stemming from its tax shelter activities.

Jenkens, which boasted more than 600 lawyers in 2001, drastically shrunk to 211 lawyers at the beginning of this month and plans to turn out the lights completely in the next couple of days.

“Jenkens has recognized…that its tax shelter practice has caused serious damage to its reputation, revenues and stability, and that as a result it ultimately cannot continue in business,” the U.S. Attorney’s office said.

Founded in 1951 in Dallas, Jenkens expanded to Houston, San Antonio, Chicago and Los Angeles, and had more than 20 practice areas, including intellectual property, labor and employment, antitrust, bankruptcy, corporate and securities, energy environmental, financial services and health.

Representatives for the firm did not return calls for comment.

Jenkens came under the spotlight in 2003 when a federal investigation revealed that a number of tax shelters, which were backed mainly by Jenkens’ lawyers in Chicago, were illegal.

The firm watched its revenue plummet and hundreds of its attorneys walk out the door as the government deepened its investigation into the firm’s tax shelter activities and a number of parties filed civil suits.

The firm tried for several years to contain the damage by terminating the partners involved and reaching an $82 million class action settlement with 1,100 tax shelter investors last summer, but was unable to recover from the scandal.

Several months ago, Jenkens began looking at combination scenarios that would transition its lawyers to other national platforms.

The firm’s Chicago IP team was picked up by Nixon Peabody. Jenkens also transferred its Los Angeles office to Baker Hostetler, and split up its Austin and San Antonio offices between Winstead PC and Jackson Walker LLP. It sent most of its Houston team to Baker Hostetler, while its litigation group went to Porter & Hedges LLP.

Jenkens admitted to the U.S. Attorney’s office that some of its attorneys developed and marketed fraudulent tax shelters and offered opinions that illegally deprived the U.S. Treasury of tax revenues.

“Those responsible for overseeing the Chicago tax practice placed unwarranted trust in the judgment and integrity of the attorneys principally responsible for that practice, and failed to exercise effective oversight and control over the firm’s tax shelter practice,” the firm said.

Jenkens said it deeply regretted its involvement in the tax practice and the harm it caused to the U.S. Treasury.

“The demise of Jenkens demonstrates that a lucrative but fraudulent tax shelter practice may provide short-term financial rewards, but at a great long-term cost,” U.S. Attorney Michael J. Garcia said.

Jenkens’ agreement with the U.S. Attorney was based on the firm’s inability to continue operations as a law firm and its acceptance of responsibility for its fraudulent tax shelter activities.

The IRS said the $76 million fine had to do with the firm’s “promotion of abusive and fraudulent tax shelters,” including its violation of tax laws for tax shelter registration and maintenance.

IRS Commissioner Mark W. Everson said the dissolution of the firm was unfortunate, but should serve as a lesson to all tax professionals not to aid or abet tax evasion by clients or promote illegal tax shelters.

Approximately 1,400 investors were affected by Jenkens’ tax advice, the IRS said, and the firm is required to owe interest and penalties on the underpayment of tax.

Since 1998, the firm and the IRS have wrangled over the release of names of the firm’s tax-shelter clients.