Angel Reyes Blog : Angel Reyes : Texas Litigation Lawyer and Attorney : Dangerous Drugs : Wrongful Death : Business Litigation

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Few people remember John Doerr’s failed MyCFO, Inc., except the unfortunate folks who got suckered into using the firm and its tax shelter strategies.  The tax shelter strategies that MyCFO used were the result of the usual coalition of a “silk stocking” law firm partner, a partner from an investment bank, partner from a big Four accounting firm, and super rich clients who didn’t want to pay taxes on their newfound wealth. Who was involved?

• James Clark, Co-founder of Netscape
  
• John Chambers, CEO of Cisco Systems
  
• James Barksdale, former CEO of Netscape
• Tom Jermoluk, former CEO of Excite@Home
  
• Larry Sonsini, partner with Wilson Sonsini
• Roy Hahn, owner of Chenery Associates
  
• Graham Taylor, then partner with LeBoeuf, Lamb, Greene & McRae
• Raymond Ruble, then partner with Brown & Wood later absorbed by Sidley & Austin
  
• Bankers from Deutsche Bank AG and Bayerische Hypovund Vereinsbank AG.

Here’s how it worked.  MyCFO sold its clients a tax shelter strategy called Cards.  Cards was the acronym for Custom Adjustable Rate Debt Structure.  My CFO would acquire ostensible 30-year bank loans to a foreign party for, say $50 million to $100 million.  A super rich client of MyCFO, one who presumably was coming into a massive capital gain situation, would assume the loan and, after some complicated collateral swapping, would claim a loss for tax purposes for all or nearly the entire loan.  Not surprisingly, the IRS invalidated the strategy.  The IRS claimed the strategy failed a basic test for legitimacy: it lacked any real economic purpose other than to lower taxes.  The IRS believed that the clients who used this tax shelter strategy were never really at risk for the ostensible $50 million or more in loans.

So, how did so many smart people, well at least rich people, get sold this tax strategy?  The typical way, they relied upon the lawyers at LeBoef, Lamb and Brown & Wood’s tax opinions.  Tax shelter strategies always rely upon an opinion written on the letterhead of a reputable, or at least well known (read big time multi-state/national law firm), that states the strategy is kosher.  In essence, according to Kevin McAuliffe, an accountant formerly with MyCFO, MyCFO and its clients, essentially bought their opinions and comfort level.  The opinions cost hundreds of thousands of dollars but yielded tax savings of millions for participants.

Similar tax shelter opinion letters have taken down major law firms.  In my hometown of Dallas, the law firm of Jenkens & Gilchrist, once the largest law firm in the City, will shut its doors at the end of this month.  Jenkens got caught up selling tax shelter opinion letters and was sued by dozens of clients.  To the credit of the firm’s partners, they all hung in the fight until most or all of the resulting litigation pending against the firm resolved.

Heygood, Orr, Reyes & Bartolomei handles complex commercial litigation cases, business litigation, civil litigation, personal injury, dangerous drugs, defective products, wrongful death lawsuits and more.

©2007 Angel Reyes
www.ReyesLaw.com