5th Circuit, Federal Judges, Money, Plaintiffs Firms, Tax Law, Texas, Tobacco / Smoking

If You Win A Massive Judgment, Try Not To Put It Into An Illegal Tax Shelter

Smoking is bad for you -- and winning massive judgments against tobacco companies can also be hazardous, if you don't pay taxes on the money.

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It will likely warm the cockles of many a Biglaw heart to hear that a bunch plaintiffs’ attorneys got smacked around by a federal court for trying to steal funds from Uncle Sam. They may beat your clients — and deservedly so, since your clients were totally poisoning people — but at least they won’t be getting away with their fat paychecks. Bask in that satisfaction as you go back to your less lucrative life.

If you want to know exactly how these lawyers did it (so you know what not to do, of course), then read on.

Or if you just want to point and laugh at the irony of public interest plaintiffs’ attorneys getting tagged for failing to pay their fair share to the public coffers, you can read on for that too….

Smoking is bad for you — and winning massive judgments against tobacco companies can also be hazardous, if you don’t pay taxes on the money. The Fifth Circuit certainly thinks so. In NPR Investments v. United States, Judge Priscilla Owen, writing for the panel that included Judge James L. Dennis and Judge Edith Brown Clement, lowered the boom on Harold Nix, Charles Patterson and Nelson Roach of the not coincidentally named law firm of Nix, Patterson & Roach.

Nix, Patterson & Roach sued the bejeezus out of Big Tobacco and collected some healthy fees:

In 1998, the attorneys won $600 million in attorneys’ fees, to be paid over a period of time, as well as $68 million in connection with tobacco litigation in other states.

With this money in hand, the partners sought ways to shelter themselves from tax liability, and formed a partnership, NPR Investments, to invest in foreign currency.

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But this is Texas, so even the modest taxes we pay in this country are automatically evil, so it’s off to find a tax shelter. Foreign currency sounds like a fair option. There’s money to be made there!

An audit ultimately found, however, that the investment scheme had virtually no way for the partners to make a profit. Rather, it generated $65 million in artificial losses for tax-deduction purposes as a “well-recognized ‘abusive’ tax shelter.”

…or you could go the Springtime for Hitler route of intentionally losing money in the interest of improperly making money. Unlike Max and Leo, the partners of Nix, Patterson & Roach really did lose money, but got caught all the same.

The 5th Circuit found Thursday that the partnership and partners must pay penalties for underpaying the Internal Revenue Service through this investment scheme.

Pursuant to the Supreme Court’s recent decision in U.S. v. Woods, NPR is subject to a 40 percent gross valuation misstatement penalty.

In addition, the individual partners must pay a “20 percent penalty for the portion of underpayment of tax that is attributable to any substantial understatement of income tax,” Judge Priscilla Owen wrote for the New Orleans-based federal appeals court.

The three-judge panel found no evidence the partnership had any “reasonable cause” for underpaying its taxes, and the court does not have jurisdiction to hear individual partners’ arguments as to their good faith.

The only thing more expensive than paying your taxes is not paying your taxes, I suppose.

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And you’d think Nix would have known this wasn’t going to work out:

This is the second verdict against Nix for using an illegal tax shelter. In 2009, a court ruled that Nix could not write down $50 million in purported losses in an investment scheme known as “Son-of-BOSS,” which stands for Bond Options Sales Strategy

But if you’re reading this to celebrate the financial woes of these lawyers, you probably should check yourself. They’ve still got a fleet of three private jets and full-time pilots on staff, so they’re probably doing all right.

(If you want to read Judge Owen’s full opinion, it’s reproduced on the next page….)

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