IRS Demands List of Tax Shelter Clients

Federal tax authorities Thursday formally demanded that a Chicago law firm cough up a list of clients who may have purchased tax shelters, a move that sent shivers through the legal community.

Jenkens & Gilchrist was served with a “John Doe” summons, which seeks the identities of clients who invested in “potentially abusive transactions” organized or sold by the firm’s Chicago office.

It was the latest move in the Internal Revenue Service’s efforts to ferret out high-end tax cheating and the first time the agency had gone after a law firm. The move raised concerns about the confidentiality of communications between lawyers and their clients.

The law firm called it an assault on one of the primary underpinnings of the legal system -- attorney-client privilege, which ensures that communications between lawyers and their clients cannot be disclosed.

“The firm is prohibited by law and its ethical responsibility to its clients from complying with the IRS demand,” Jenkens & Gilchrist said in a statement. “It has long been the law of this country that Americans have a right to consult with an attorney in confidence, and that only the clients themselves can waive that right.”

Tax authorities countered that federal tax law demands that promoters of certain transactions disclose both the purchaser and the nature of the transaction. A tax shelter promoted by a law firm isn’t shielded from scrutiny, IRS officials said.

When an attorney serves as a salesman, “it’s not a classic attorney-client relationship,” the agency said.

“Our efforts to curb potentially abusive tax-avoidance transactions depend on our ability to obtain and use a web of information about these transactions and those who invest in and promote them,” IRS Chief Counsel B. John Williams said. He said the agency would continue to issue summonses to law firms, accounting firms, investment banks and others “who may have been involved in the promotion of questionable transactions.”

The agency said Thursday that it was investigating 92 shelter promoters, including law firms, investment banks and accounting firms.