Free Cross Motion [Dispositive] - District Court of Federal Claims - federal

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UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION UNITED STATES OF AMERICA, Petitioner, v. JENKENS & GILCHRIST, P.C., a Professional Corporation, Respondent. __________________________________/ DECLARATION OF JAMES M. JOHNSON I, James M. Johnson, pursuant to 28 U.S.C. Section 1746, declare: 1. I am a Revenue Agent with the office of Financial Services Industry, Large and Mid-Size

GOVERNMENT EXHIBIT 3

Business Division (LMSB), Internal Revenue Service (IRS or Service), located in Chicago. I have held this position since June of 2000. From 1987 to June, 2000, I was a Revenue Agent in the Examination Division of the IRS in Chicago. I have been employed by the Service for over 15 years. 2. I am authorized to utilize Internal Revenue Service summonses issued under the authority

of §§7602 and 7609(f)1; Treasury Regulations, Sec. 301.7602-1, 26 C.F.R. §301.7602-1; IRS Delegation Order No. 4 (as revised). 3. The IRS is investigating the role of the law firm of Jenkens & Gilchrist, a Professional

Corporation ("J&G"), doing business at 225 W. Washington Street, Suite 2600, Chicago, Illinois, in organizing and selling tax shelters to determine J&G's compliance with the registration and list maintenance requirements of §§6111 and 6112 and its potential liability for

All "§" references are to the Internal Revenue Code, 26 U.S.C., unless otherwise specified. All "Govt. Ex." references are to the Appendix of Exhibits submitted in support of the Petition to Enforce Summonses.

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penalties imposed by §§6707 and 6708, during the period January 1, 1998 through the present. I have been assigned to conduct that examination. 4. The IRS is also conducting an investigation to determine the correct federal tax liabilities

of certain United States taxpayers who, during any part of the period January 1, 1998 through June 15, 2003, participated in a transaction which was or later became a "listed transaction" or other "potentially abusive tax shelter" organized or sold by the Chicago office of the law firm of J&G. I have been assigned responsibility to gather information from which the identities of the participants in the "potentially abusive tax shelters" can be determined. Identification of the participants is the first necessary step to enable the IRS to determine the correctness of federal tax returns filed by the participants and to determine the correct federal tax liabilities of the participants. 5. The exhibits referred to in this Declaration are contained in a separately bound Appendix

of Exhibits being filed in support of the United States' Petition To Enforce Summonses Issued to Jenkens & Gilchrist, P.C. Some of those exhibits have been redacted to protect the privacy of tax shelter participants. I. J&G is Organizing and Selling Tax Shelters 6. Pursuant to §6111, tax shelter "organizers" must register certain tax shelters with the

IRS. In addition, pursuant to §6112, "organizers and sellers" of "potentially abusive tax shelters" must maintain a list of investors which is to be provided to the IRS upon request. Shelters for which list maintenance is required are those for which registration is required under §6111(c) or (d), and "listed transactions," i.e., those which the IRS has through notice, regulation or other published guidance, identified as tax avoidance transactions. Failure to comply with the

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registration and list maintenance requirements subjects the organizer or seller to monetary penalties pursuant to §§6707 and 6708. 7. The IRS considers a "listed transaction" and all substantially similar transactions to have

been structured for a significant tax avoidance purpose. The IRS has from time to time published notices of such "listed transactions." Notice 2001-51 [Govt. Ex. 1] identifies a number of listed transactions. 8. It appears that the Chicago office of J&G is involved in the organization of tax shelters

which should be registered pursuant to §6111 and the organization and sale of "listed transactions" and other "potentially abusive tax shelters" for which it is required to maintain lists of investors and other information pursuant to § 6112. 9. The organization and sale of these transactions, also referred to in this declaration as

"promotion," appears to have been coordinated by J&G through its "Tax & Estate Planning Practice Group" and/or its "Structured Investment practice" in its Chicago office, and primarily through or at the direction of Paul Daugerdas, Donna Guerin and Erwin Mayer. 10. The engagement letters used by J&G demonstrate that it was an organizer of tax shelters

subject to registration and an organizer and/or seller of "potentially abusive tax shelters." These letters describe the fee to be charged (which appears to be based on a percentage of the tax loss to be generated), the services to be rendered and the size of the transaction. I have determined that the transactions identified in at least two of these letters are the same as or substantially similar to the "listed transaction" described in Notice 2000-44, known as "Son of Boss." [Govt. Ex. 3]. The letters also indicate that J&G will be performing acts of an "organizer" and/or "seller" under both the applicable Temporary and Final Treasury Regulations.

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a.

Govt. Ex. 9-A-3 is a J&G engagement letter which states that a fixed fee of

$336,000 will be charged: for the documentation of the transactions, our research and the rendering of a "more likely than not" tax opinion letter setting forth our conclusions and rationale in connection with a foreign currency option spread transaction of approximately $14 million. b. Govt. Ex. 9-A-4 is a J&G engagement letter which states that a fixed fee of

$1,428,980 will be charged for: advice and assistance in the facilitation and execution of a European digital foreign currency option investment transaction in the amount of approximately $50 million, the documentation of the transaction, and our research and the rendering of a "more likely than not" tax opinion letter setting forth our conclusions and rationale. 11. Purchasers of one such transaction organized and sold by J&G through Ernst & Young,

LLP (E&Y) have brought suit against J&G and others to recover fees paid to J&G and E&Y regarding their co-promotion of a COBRA transaction. Camferdam v. Ernst & Young International, Inc., et al. (including Jenkens & Gilchrist, an Illinois Professional Corporation), Civil No. 2002civ10100 (USDC S.D.N.Y.). In their second amended complaint they allege that 3% of the tax savings on a transaction to eliminate gains in excess of $70 million ­ an amount in excess of $2 million ­ was paid to J&G indirectly through entities for the development of the tax shelter and for writing a legal opinion on the tax shelter. [Camferdam Complaint, ¶¶60, 127 & n.17, Govt. Ex.11]. 12. It also appears that J&G has co-promoted potentially abusive tax shelters with third-

parties, including, but not limited to, Ernst & Young, LLP, BDO Seidman, LLP, KPMG, LLP, Diversified Group, Inc., Wachovia Corporation, and Deutsche Bank Securities, Inc., d/b/a/

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Deutsche Bank Alex Brown [See J&G Executive Summary, Govt. Ex. 23, referenced in Wachovia Decision, Govt. Ex. 22; Govt. Exs. 10-13]. 13. The promoter role of J&G is disclosed in the Declaration of Robert B. Coplan, National

Director of the Center for Family Wealth Planning at Ernst & Young, LLP [Govt. Ex. 10], who states that: a. "One of the advisors that E&Y knew was offering clients a foreign currency derivative transaction was the law firm of Jenkens & Gilchrist ("J&G"). During the fall of 1999, E&Y began discussing with J&G the possibility of structuring and implementing a similar transaction that could be offered to E&Y's clients. E&Y did not have an attorney-client relationship with J&G, but rather, worked with J&G to plan and structure the COBRA ["Currency Options Bring Reward Alternatives"] transaction for presentation to E&Y clients." [Declaration of Robert B. Coplan, ¶4]. "The roles that would be played by E&Y, J&G and DeutscheBank in connection with the COBRA transaction were determined before E&Y presented the transaction to its clients. The fee structure was also discussed between E&Y, J&G and DeutscheBank before the transaction was offered to E&Y clients. The fees paid to E&Y and J&G were fixed rather than hourly based." [Declaration of Robert B. Coplan, ¶7]. "J&G facilitated the creation of the entities used in all except one of the COBRA transactions implemented by E&Y clients. The work done by J&G in this regard included preparation of certificates of formation, partnership agreements, and articles of incorporation. J&G also coordinated filing necessary documents with the State of Delaware and coordinated filing Forms SS-4 (Application for Employer Identification Number) and Forms 2553 (Election by a Small Business Corporation) with the Internal Revenue Service." [Declaration of Robert B. Coplan, ¶9]; and "J&G wrote a tax opinion for all except one of the COBRA transactions implemented by E&Y clients." [Declaration of Robert B. Coplan, ¶ 10].

b.

c.

d.

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14.

The Camferdam Complaint alleges that Daugerdas developed a "strategy," referred to as

"COBRA" involving the purchase and sale of options to generate artificial tax losses. Camferdam Complaint, ¶¶ 55-58, 182. 15. Purchasers of other such transactions organized and sold by J&G through BDO Seidman,

LLP and Deutsche Bank Alex Brown have brought suit against J&G and others to recover fees paid to J&G, BDO and DB Alex Brown regarding their co-promotion of a COBRA transaction. See Plaintiffs' Original Class Action Complaint filed in Denny v. Jenkens & Gilchrist, a Texas Professional Corporation,, et al. (including Jenkens & Gilchrist, an Illinois Professional Corporation), Civil No. 2003civ5460 (USDC S.D.N.Y.) [Govt. Ex. 12]. The Denny complaint makes similar allegations about J&G's role in organizing tax shelters. [Denny Complaint, ¶¶5258 and ¶¶176-181, Govt. Ex. 12]. 16. The IRS has analyzed the COBRA transaction described in the Camferdam complaint,

which appears to have been organized and/or sold by the Chicago office of J&G, and concluded that it is the same or similar to the "listed transaction" described in IRS Notice 2000-44 [Govt. Ex. 3]. The IRS has also concluded that the COBRA transaction should have been registered as a tax shelter pursuant to §6111(c) and is a potentially abusive tax shelter within the meaning of §6112. 17. In addition to the COBRA transaction, I have identified transactions organized or sold by

J&G which are referred to by the following three names: a. b. c. "Foreign currency option spread transaction." See J&G Retention Agreement [Govt. Ex. 9-A-3]; "European digital foreign currency option investment transaction." See J&G Retention Agreement [Govt. Ex. 9-A-4]; and "Option Partnership Strategy" [Govt. Ex. 9-A-5 ¶ 18].

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I have obtained copies of documents related to these three named transactions. Based upon my examination of the documents related to these three named transactions, as well as the examination by other IRS employees familiar with the "listed transaction" described in Notice 2000-44, the IRS has determined that these transactions appear to be the same as or similar to a Notice 2000-44 "listed transaction." 18. The promoter role of J&G is also disclosed in Diversified Group, Inc. v. Daugerdas, 139

F.Supp.2d 445 (S.D.N.Y. 2001)[Govt. Ex. 13], a suit in which Diversified Group, Inc. ("DGI") sued Daugerdas, alleging a breach of fiduciary duty in his marketing of a confidential strategy allegedly developed by DGI known as the "Option Partnership Strategy." Daugerdas attested in an affidavit he filed in that action that: a. The services he provides his clients include consultation, analysis, advice, and the structuring of investment and finance transactions. One of the primary services he offers to his clients is a written opinion on the correct tax treatment of certain economic business transactions. [Daugerdas Affidavit ¶6, Govt. Ex. 9-A-5]; He jointly marketed and solicited transactions with DGI on at least three occasions during the period 1997 through 1999 [Daugerdas Affidavit ¶16, Govt. Ex. 9-A-5]; and He was not acting as counsel for DGI in his co-promotion of a confidential strategy developed by DGI, known as the "Option Partnership Strategy" [Daugerdas Affidavit ¶¶10-18 and 21-24, Govt. Ex. 9-A-5].

b.

c.

19.

In addition to "listed transactions," the IRS has identified certain factors which suggest

that a transaction is a "potentially abusive tax shelter." One of those factors is a transaction in which participants enter into confidentiality agreements which prohibit participants from disclosing the tax treatment or the tax structure of the transaction. See, e.g. Treas. Reg. §301.6112-1(c)(2)(iii)(B).

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20.

It appears that in the marketing of these tax shelters J&G required co-promoters, such as

BDO, E&Y and KPMG to have potential purchasers sign a J&G confidentiality agreement before anything else took place [See J&G Confidentiality Agreements with BDO and E&Y clients, Govt. Exs. 9-A-6 and 9-A-7; John Does v. Wachovia Corp., Civil No. 3:03CV236 (W.D.N.C. June 24, 2003), Memorandum and Order, p.8 (quoting identical language from a J&G Confidentiality Agreement with a KPMG client), Govt. Ex. 22]. 21. The stated purpose of the J&G Confidentiality Agreement is to set forth in writing the

agreement between J&G and the purchaser to keep confidential: certain financing structures (the "Structures") developed by J&G and/or its clients, consultants or co-counsel, that provide economic, financial, business and tax advantages for individuals and companies through the use of the Structures. [See J&G Confidentiality Agreements, Govt. Exs. 9-A-6, 9-A-7]. The J&G Confidentiality Agreement further provides: Undersigned agrees that all Confidential Information is, and shall remain, proprietary to J&G, and that Undersigned will disclose such information only to such of its internal personnel to whom such disclosure is necessary to evaluate the Structures. [See J&G Confidentiality Agreements, Govt. Exs. 9-A-6, 9-A-7]. 22. The J&G Confidentiality Agreement employed by J&G to market these transactions

expressly disclaimed the existence of a fiduciary relationship between J&G and the potential purchasers, providing: Undersigned and J&G are acting solely as independent contracting parties, and neither party shall be deemed to be the agent or fiduciary of the other. . . Undersigned will be solely responsible for the evaluation of the financial, tax and accounting consequences of the Structures and J&G shall not be deemed to have made any representations with respect thereto unless separately contracted for.

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[See J&G Confidentiality Agreements, Govt. Exs. 9-A-6 & 9-A-7; also see John Does v. Wachovia Corp., Civil No. 3:03CV236 (W.D.N.C. June 24, 2003), Memorandum and Order, p.8 (quoting identical language from a J&G Confidentiality Agreement with a KPMG client), Govt. Ex. 22]. 23. J&G did not have an attorney-client relationship with co-promoters such as E&Y [See

Coplan Declaration, ¶4, Govt. Ex. 10]. 24. Another factor identified by the IRS which suggests that a transaction is a "potentially

abusive tax shelter" is a transaction which generates tax losses equal to or greater than $4 million for an individual or trust in any combination of taxable years, or $10 million for a corporation. See, e.g. Treas. Reg. 301.6112-1(b)(2)(i)(B), incorporating Treas. Reg. §1.6011-4(b)(5)(i) (A)-(C). 25. J&G promoted transactions which generated tax losses equal to or greater than $4 million

for an individual. For example, according to the Camferdam Complaint, the transaction promoted by J&G to the plaintiffs was planned to generate tax losses in excess of $70,000,000. [See Camferdam Complaint, ¶¶110 and 137, Govt. Ex. 11]. In addition, the two engagement letters noted previously [Govt. Exs. 9-A-3 & 9-A-4], describe the fee to be charged, the services to be rendered and the size of the transaction, which appears to be the tax loss to be generated. Govt. Ex. 9-A-3 describes a transaction involving a tax loss of $14,000,000. Govt. Ex. 9-A-4 describes a transaction involving a tax loss of $50,000,000. 26. It appears that potential purchasers who elected to purchase a J&G "Structure" were sent

a retention agreement for "legal services." The services to be provided included: advice and assistance in the facilitation of the ... transaction ..., the documentation of the transaction, and our research and the rendering of a "more likely than not" opinion letter setting forth our conclusions and rationale. 9

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[See e.g,. J&G Retention Agreement for a "Foreign currency option spread transaction," Govt. Ex. 9-A-3; J&G Retention Agreement for a "European digital foreign currency option investment transaction," Govt. Ex. 9-A-4]. 27. J&G documented and facilitated the implementation of the Structures it organized and

sold by creating entities necessary to effect these transactions. J&G orchestrated the preparation of certificates of formation, partnership agreements, and articles of incorporation. [Coplan Decl. ¶¶ 8 & 9; Govt. Ex. 10; See also Camferdam Complaint ¶¶102-106, Govt. Ex. 11; Denny Complaint ¶¶93-97, Govt. Ex. 12]. J&G filed the certificates of incorporation and certificates of formation on behalf of the corporations and limited liability companies it established to implement the tax shelter with the appropriate state offices. [Govt. Exs. 9-A-8 & 9-A-9]. As explained in the Coplan Declaration, J&G facilitated the creation of the entities used in all except one of the COBRA transactions implemented by E&Y clients. The work done by J&G in this regard included preparation of certificates of formation, partnership agreements, and articles of incorporation. J&G also coordinated filing necessary documents with the State of Delaware and coordinated filing Forms SS-4 (Application for Employer Identification Number) and Forms 2553 (Election by a Small Business Corporation) with the Internal Revenue Service. [Declaration of Robert B. Coplan, ¶9, Govt. Ex. 10] . Identification of the entities which are required to file certain returns and information with the IRS, should, I believe, lead to the identification of the purchasers who claimed the ultimate tax benefits. The IRS is unable to retrieve and/or search the filings made with the State of Delaware. 28. J&G also facilitated these transactions by filing forms with the IRS to obtain tax

identification numbers on behalf of the entities it helped to create and by filing forms with the IRS to elect treatment under Subchapter S for corporations it helped to create. [See Forms SS-4,

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8821 and 2553, Govt. Exs. 14-A, 14-B, 14-C, 15 and 16]. The IRS is unable to retrieve the Forms SS-4, 8821 and 2553 without the identities of the entities. 29. Also as part of its facilitation of the transactions, it appears that J&G coordinated the

creation of brokerage accounts with DB Alex Brown on behalf of the entities used to effectuate these transactions. J&G drafted authorization letters for the transfer of funds within these accounts to effectuate the transactions. In the course of the communications with the broker and/or banker involved, the identity of the investor was apparently disclosed, as it appears on the brokerage statements for the accounts used to effectuate these transactions. [See DB Alex Brown brokerage statements, Govt. Ex. 19; J&G draft letter dated October 20, 1999, to authorize DB Alex Brown to transfer funds, Govt. Ex. 17; executed letter dated October 20, 1999, authorizing DB Alex Brown to transfer funds, Govt. Ex. 18]. 30. It appears that upon consummation of these transactions, J&G issued a "canned" "more

likely than not" tax opinion letter on the propriety of the transaction. [Camferdam Complaint, ¶¶78, 80, 89, 181, 327, Govt. Ex. 11; Denny Complaint, ¶¶75, 77, 89, 176, 330, Govt. Ex. 12; J&G engagement letters, Govt. Exs. 9-A-3 and 9-A-4]. J&G then forwarded the opinion, apparently along with other documents necessary to complete the purchaser's tax return, using a form letter which states: Enclosed please find our tax legal opinion and the information necessary to complete tax returns for the above-referenced entities. We have also provided this information to your tax and financial advisor. [See J&G transmittal letter to participant, Govt. Ex. 20]; 31. J&G forwarded a copy of its opinion to the purchaser's return preparer, using a form

letter which stated:

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This letter is to confirm that our opinion dated ... is intended to be relied upon by you in connection with the preparation of ... tax returns for ... and the entities he controls. As a "more likely than not" opinion, this opinion should satisfy the standards of section 6662 of the Internal Revenue Code of 1986, as amended (the "Code"), regarding reliance by the taxpayer, and exceed the standards for income tax return preparers set forth in Code section 6694. [See J&G transmittal letter to return preparer, Govt. Ex. 21]. II. The Promoter Summonses 32. As part of the examination into J&G's compliance with the registration and list

maintenance requirements of §§6111 and 6112 and its potential liability for penalties imposed by §§6707 and 6708, on May 21, 2002, I issued twenty-two (22) Internal Revenue Service summonses to J&G, directed to Paul M. Daugerdas, as then President and Managing Shareholder of J&G's Chicago Office ("Promoter Summonses"), to appear before me to testify and to produce books, records, documents and other data related to 19 "listed transactions" and other tax shelters to determine whether the registration and/or list maintenance requirements applied. Promoter Summonses 1-16 (described in Hartnett Declarations, ¶9, Govt. Exs. 9-A-1 & 2) correspond to the listed transactions identified in Notice 2001-51, Govt. Ex. 1. The Promoter Summonses requested information for the period January 1, 1998 through April 30, 2002. Since the summonses were issued in May of 2002, I selected April 30, 2002 as a date which I believed would provide current information. My examination, however, did not end with the period ending April 30, 2002, and in fact it continues and includes present conduct.

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33.

I understand the United States is currently seeking to enforce five (5) of those

summonses [Govt. Exs. 4-8], related to the following types of potentially abusive tax shelters:
Promoter Summons 8 11 19 20 21 Summons for documents related to the following types of potentially abusive tax shelter transactions Notice 99-59 - Tax Avoidance Using Distributions of Encumbered Property Notice 2000-44 - Tax Avoidance Using Artificially High Basis Potential Tax Shelter Transactions #1 - described in §6111(c) Potential Tax Shelter Transactions #2 (Transactions structured to generate tax benefits exceeding $1Million) Foreign Tax Shelters

Promoter Summonses 8 and 11 seek information about two particular listed transactions: a. Summons 8 seeks information about the listed transaction described in Notice 99-59 (transactions involving the distribution of encumbered property in which taxpayers claim tax losses for capital outlays that they have in fact recovered (identified as "listed transactions" on February 28, 2000)) [See Notice 99-59, Govt. Ex. 2]; Summons 11 seeks information about the listed transaction described in Notice 2000-44, commonly known as "Son of Boss" (transactions generating losses resulting from artificially inflating the basis of partnership interests (identified as "listed transactions" on August 11, 2000)) [See Notice 2000-44, Govt. Ex. 3].

b.

Promoter Summons 19 seeks information about transactions which may be subject to the registration requirements of §6111(c). Promoter Summonses 20 and 21 seek information about tax shelters which may be subject to the requirements of §§6111 and/or 6112, but are not the same or similar to the transactions described in published guidance as a "listed transaction" described in Promoter Summonses 1-18 and 22, or the same as transactions described in Promoter Summons 19 [Govt. Exs. 6-8].

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34.

Each of these Promoter Summonses were served upon the respondent on May 21, 2002,

as indicated in the Certificates of Service on the reverse side of the summonses [Govt. Exs. 4-8]. 35. J&G responded to the Promoter Summonses in July and August, 2002, through counsel,

that it had no documents responsive to the Promoter Summonses, except as to Promoter Summonses 8 and 11, as to which it admits that 607 of the client files of the Tax and Estate Planning Group may contain responsive information. J&G refused my request that an officer of J&G sign the responses to the Promoter Summonses, which were only signed by its counsel. 36. J&G supported its responses to Promoter Summonses 1-18 and 22, but not 19-21, with

declarations by Daniel Hartnett, of the law firm of Martin, Brown & Sullivan [see, e.g., Hartnett Declarations, Govt. Exs. 9-A-1 & 2], in which Hartnett represents that: a. He was retained to assist J&G in responding to all 22 of the promoter summonses [Hartnett Declarations, ¶¶5-6, Govt. Exs. 9A-1 & 2]; He examined all the client files of J&G's Tax and Estate Planning Practice Group, which totaled approximately 700 files [Hartnett Declarations, ¶¶12-18, Govt. Exs. 9-A-1 & 2]; He also examined J&G's retained copies of all the corporate minute books and the books relating to the limited liability corporations which were used to effectuate these transactions [Hartnett Declarations, ¶¶12-15, Govt. Exs. 9-A-1 & 2]; Upon review of J&G's files for its Tax and Estate Planning Group, he determined that 7 client files were responsive to summons 8, regarding Notice 99-59 [Hartnett Declaration regarding Summons 8, ¶22, Govt. Exs. 9-A-2 ]; and Upon review of J&G's files for its Tax and Estate Planning Group he determined that 600 client files were responsive to summons 11, regarding Notice 2000-44 [Hartnett Declaration regarding Summons 11, ¶22, Govt. Exs. 9-A-1].

b.

c.

d.

e.

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37.

Despite having been retained to assist J&G in responding to all 22 Promoter Summonses,

no Hartnett declaration was submitted to support J&G's assertion that it has no documents responsive to Promoter Summonses 19-21, through which the IRS seeks information about transactions which may be subject to the requirements of §§ 6111 and/or 6112, but may not be the same or similar to one of the listed transactions specified in the other nineteen Promoter Summonses. 38. J&G refused to produce any of the documents from the 607 client files identified by

Hartnett as responsive to Promoter Summonses 8 and 11. J&G has not produced any of the corporate minute books or books relating to the limited liability companies which were used to effectuate the transactions described in Promoter Summonses 8 and 11. J&G has not produced any information responsive to Promoter Summonses 19-21, although it did respond by letter dated August 21, 2002, from its counsel, that it had no responsive documents. Further, although each of the Promoter Summonses provided clear instructions on claiming privilege and the creation and provision of a privilege log, J&G has not provided any privilege logs in response to any of the Promoter Summonses. 39. The information sought by Promoter Summonses 8, 11, 19, 20 and 21 relates to the

investigation of the role of J&G in organizing and selling tax shelters to determine J&G's compliance with the registration and list maintenance requirements of §§6111 and 6112 and its potential liability for penalties imposed by §§6707 and 6708, for the years under investigation. The information sought by these summonses will allow me and other IRS agents to examine J&G's role as an organizer of "tax shelters" and as an organizer or seller of "potentially abusive tax shelters" and allow an examination of the transactions and "Structures" to determine whether such "Structures" should have been registered, and whether such "Structures" are the same or 15

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substantially similar to any of the "listed transactions" or are other "potentially abusive tax shelters." The information sought by the Promoter Summonses will also help to determine the amount, if any, of penalties to be imposed for failure to comply with §§6111 and 6112. 40. The identification of co-promoters, purchasers and other participants and facilitators will

allow IRS agents to interview such persons to gather from them information regarding J&G's role in organizing tax shelters and in organizing and selling "potentially abusive tax shelters." The ability to obtain such information may be important, for example, to determine whether J&G made representations from which potential purchasers may have concluded that the transaction would generate tax benefits exceeding twice the amount of the cash and property contributed by the purchaser. Whether J&G made such representations is relevant to the determination of whether a transaction may be one described in Promoter Summons 19 (§6111(c) shelters). See also, Temp. Treas. Reg. §301.6111-1T, Q&A 4, 8 & 9. Representations made by J&G to others may also be important to determine whether J&G had "reasonable cause" for its failures, if any, to register tax shelters pursuant to §6111 or maintain lists pursuant to §6112, which could be a defense to the penalties imposed by §§6707 and 6708. 41. The identification of participants and co-promoters is also relevant to the determination

of the fees paid to J&G. As described in the Camferdam complaint, fees in excess of $2 million were paid to J&G, indirectly, through the DB Alex Brown accounts of the entities created by J&G. [Camferdam Complaint, ¶127 and fn.17, Govt. Ex. 11]. Thus, the IRS may want to verify with the participants the amount of the fees paid, directly or indirectly, for each transaction. Among other things, the amount and nature of the fee paid is relevant to the question of whether J&G was an organizer or seller with respect to a particular transaction. The amount of the fee paid is also relevant to a determination of the actual tax benefit that J&G expected the 16

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transaction would generate for the participant. The amount of the fee is also relevant to a determination of the penalty with respect to shelters which should have been registered pursuant to §6111(d). 42. The IRS does not have possession of the information sought by the five Promoter

Summonses. To the extent that the IRS has obtained what purport to be copies of documents prepared by J&G, such documents were not obtained from J&G but from others. The IRS needs to examine the documents maintained in the files of J&G to assure the authenticity of the documents and statements in those documents attributed to either J&G or other parties. To the extent the IRS might have some of the summoned information in its own records, the IRS has attempted to obtain the information from its own records, but has found that such information cannot be located and/or is not readily available, especially when the identity of the participant is unknown. 43. There is no "Justice Department referral," as that term is described in §7602(d)(2), in

effect with respect to J&G for the periods under investigation. 44. All administrative prerequisites for issuance of the Promoter Summonses have been met. III. The John Doe Summons 45. As part of the IRS investigation to determine the correct federal tax liabilities of certain

United States taxpayers who, during any part of the period January 1, 1998 through June 15, 2003, participated in a transaction which was or later became a "listed transaction" or other "potentially abusive tax shelter" organized or sold by the Chicago office of J&G, on June 18, 2003, Territory Manager James J. Roosey, issued a "John Doe Summons" to J&G [Govt. Ex. 9A]. On June 19, 2003, the Court (Darrah, J.) signed an Order Granting United States' Ex Parte Petition for Leave to Serve IRS "John Doe" Summons, (Civil No. 03C-4190, N.D. Il) [Govt. Ex. 17

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9-B]. Also on June 19, 2003, I served the John Doe Summons on J&G by delivering a copy to Robert Schwimmer, the President and Managing Shareholder of the Chicago Office of J&G. [Govt. Ex. 9-A]. 46. 47. J&G has not produced the summoned "John Doe" information. The information sought by the John Doe Summons will help identify United States

taxpayers who, during any part of the period January 1, 1998 through June 15, 2003, participated in a transaction which was or later became a "listed transaction" or other "potentially abusive tax shelter" organized or sold by the Chicago office of J&G. The IRS has determined that such transactions have been structured for significant tax avoidance purposes and the identification of the participants is the first necessary step to determining the correctness of the participants' returns and their correct tax liabilities. 48. In addition to a general demand that J&G provide the identities of United States

taxpayers who, during any part of the period January 1, 1998 through June 15, 2003, participated in a transaction which was or later became a "listed transaction" or other "potentially abusive tax shelter" organized or sold by the Chicago office of the law firm of J&G, the John Doe Summons seeks 13 specific items or categories of information which should identify members of the John Doe class. Each of the items described in a-e, below, should lead to the identification of members of the John Doe class, and each of the items described in b-d, below, relates to one or more of the factors which the IRS has associated with "potentially abusive tax shelters." a. It appears that, at a minimum, 86.7% (607/700) of the files of the "Tax and Estate Planning Practice Group" examined by Hartnett contain records that are responsive to summonses seeking documents relating to transactions that were or later became "listed transactions" or other "potentially abusive tax shelters." Because of the high percentage of files which Hartnett found to contain responsive information, and because Hartnett did not provide an 18

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opinion as to whether J&G possessed documents responsive to promoter summonses 19, 20 and 21, I have reason to believe that all 700 client files, as well as the corporate minute books and limited liability company books examined by Hartnett, may contain information identifying members of the John Doe class. (Items 1-4 of the John Doe Summons). b. As explained above, it appears that J&G organized and/or sold transactions which are the same or similar to the "listed transaction" described in Notice 2000-44 (Items 5 -7 of the John Doe Summons), which J&G referred to as: i. ii. iii. c. "Foreign currency option spread transaction" "European digital foreign currency option investment transaction" "Option Partnership Strategy"

As explained above, J&G entered into Confidentiality Agreements with potential purchasers of "potentially abusive tax shelters" which prohibit participants from disclosing the tax treatment or the tax structure of the transaction. (Item 8 of the John Doe Summons). Also as explained above, it appears that purchasers of "potentially abusive tax shelters" which were organized or sold by J&G through its Chicago office generated tax losses greater than or equal to $4 million. (Item 9 of the John Doe Summons). Finally, as explained above, J&G, through its "Tax & Estate Planning Practice Group" and/or the "Structured Investment practice" of its Chicago office "documented" and "facilitated" participation in "potentially abusive tax shelters" through the preparation and filing of Certificates of Incorporation or Certificates of Formation. Identification of the entities for which such filings were made and which are required to file certain returns and information with the IRS, should, I believe, lead to the identification of the purchasers who claimed the ultimate tax benefits. (Items 10-13 of the John Doe Summons).

d.

e.

Once the participants in the "potentially abusive tax shelters" are identified, the IRS can begin to determine the correctness of federal tax returns filed by the participants and determine the correct federal tax liabilities of the participants.

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49.

The IRS does not have possession of the information sought by the John Doe Summons.

To the extent that the IRS has obtained what purport to be copies of documents prepared by J&G, such documents were not obtained from J&G but from others. The IRS needs to examine the documents maintained in the files of J&G to assure the authenticity of the documents and statements in those documents attributed to either J&G or other parties. To the extent the IRS might have some of the summoned information in its own records, the IRS has attempted to obtain the information from its own records, but has found that such information cannot be located and/or is not readily available, especially when the identity of the participant is unknown. The IRS has not been successful in identifying all members of the John Doe class, in part, because it appears that these transactions are structured such that the transaction is not disclosed on the individual federal income tax return of the purchaser. The claimed tax benefits from these transactions are netted against gain or income on a flow-through entity-level return using entities (such as sub-chapter S corporations, partnerships, and limited liability companies) created by J&G. Nor is the transaction otherwise specifically disclosed on the purchaser's individual return. Therefore, inspection of a particular purchaser's return does not readily disclose the purchaser's involvement in the transaction or the potential understatement or misstatement of income from involvement in the transaction. And, in any event, the IRS cannot inspect every tax return filed or audit every taxpayer. The IRS has identified a number of participants in "potentially abusive tax shelters" organized or sold by J&G, but does not know if the participants identified are the same as those identified by Hartnett in response to Promoter Summonses 8 and 11.

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50.

To my knowledge, there is no "Justice Department referral," as that term is described in

§7602(d)(2), in effect with respect to any unknown "John Doe" for the periods under investigation. 51. All administrative prerequisites for issuance of the John Doe Summons have been met.

I declare under penalty of perjury, pursuant to 28 U.S.C. § 1746, that the foregoing is true and correct. Executed this 13th day of August, 2003. /s/ James M. Johnson JAMES M. JOHNSON Revenue Agent Financial Services Industry Large and Midsize Business Internal Revenue Service 230 S. Dearborn St. Chicago, IL 60604

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