A federal judge in Chicago has handed the Internal Revenue Service another win in its efforts to breach attorney-client privilege in pursuit of tax shelter users and the professionals who aid them.
In a ruling Friday, Senior U.S. District Judge James B. Moran rejected a privilege claim and ordered a Texas law firm to turn over documents and names of clients it told that certain shelters would probably survive legal challenge.
Moran told the firm, Jenkens & Gilchrist, to begin complying this week with IRS summonses. He also cautioned the clients themselves that they will be subject to penalties if they make privilege claims in court that are found to be frivolous.
Jenkens & Gilchrist said in a statement that it will comply with the judge's order. It added, "What should not be forgotten . . . is that a lawyer has an ethical obligation to protect the confidences of a client" and "we continue to believe that the proper course of action . . . is to assert the privilege on behalf of a client until such time as it is clear that there is no basis for doing so."
In a statement, Internal Revenue Commissioner Mark W. Everson said, "This is yet another in a string of victories in the tax shelter battle." He added, "The courts are rapidly dismantling the baseless claim of privilege invoked by attorneys and accountants attempting to hide abusive transactions from IRS scrutiny."
Moran said the case mirrored another in which the same court last month rejected appeals by the law firm Sidley Austin Brown & Wood and its clients to block disclosure of clients' names.
The judge in the Sidley Austin case, Matthew F. Kennelly, noted that the government produced evidence that the firm "marketed tax shelters and sold opinion letters to tax shelter participants. . . . The IRS has reason to question the accuracy of returns filed by those who received opinion letters from" the firm.
In the Jenkens case, Moran added that Jenkens "clients are hereby put on notice that the court has reviewed a sample" of the disputed material "and determined that there does not appear to be sustainable grounds for the assertion of privilege for the great majority of client materials. Clients are further put on notice that the court will consider imposition of sanctions for the assertion of frivolous or unsubstantiated claims of privilege."
"The court order makes it clear that tax shelter promoters and customers can run, but they can't hide," Greg Jenner, acting assistant treasury secretary for tax policy, said in a statement.
Earlier this month in the U.S. District Court for the District of Columbia, Chief Judge Thomas F. Hogan rejected a claim of privilege by accounting firm KPMG on shelters it marketed after coming "to the inescapable conclusion that KPMG has taken steps since the IRS investigation began that have been designed to hide its tax shelter activities."