3 Investors Sue Bank One Over Tax Shelters

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Three investors filed a lawsuit against Bank One Corp. accusing it of marketing a tax shelter that let wealthy investors improperly hide millions of dollars. The lawsuit filed in Illinois state court alleges fraud and accounting malpractice, and seeks punitive damages. Other defendants include Deutsche Bank AG, American Express Co., White & Case LLP, and defunct accounting firm Arthur Andersen.

This is the latest case involving alleged improper tax shelters. KPMG this month also apologized for helping set up illegal shelters, hoping to avoid a possible indictment like the one that destroyed Andersen.

The case involves two tax shelters call Homer and Bart, named after cartoon characters. According to the complaint, Deutsche Bank provided loans and conducted related transactions to help carry out the tax avoidance strategy, and it worked with its attorneys White & Case to design Homer.

American Express, meanwhile, prepared the 2001 tax returns for two of the plaintiffs, Donald and Laurie Wilson, while Anderson prepared the return for the other, Kenneth Brody. Both firms approved of the use of the shelters, the complaint said.

According to the compliant, Bank One approached the law firm Jenkens & Gilchrist in January 2001, seeking legal opinion legitimizing the Bart shelter and hoping the firm could use its marketing muscle to promote it. Over the next few months, Jenkens and Bank One, together with Deutsche Bank and White & Case, reworked Bart into Homer, a shelter involving options trading that might hide losses and appeal to high taxpayers.

Bart stood for "basis adjusted remainder trust," and Homer stood for "hedge option monetization of economic remainder."

In the end, the banks and Jenkens worked together on one Bart, but about 40 Homers.

According to the complaint, the plaintiffs bought Homers in November of 2001, believing them to offer a legitimate way to save taxes. The Wilsons were told that Homer took advantage of a tax code loophole to reduce tax liability.

The complaint, however, stated Homer and Bart were similar to another shelter, Cobra, that the Internal Revenue Service had banned in 2000. The agency considers tax shelters that exist to produce losses and lack economic substance to be illegal.

After retaining new tax and legal advisors, the plaintiffs said they learned that their shelters could succeed only if the IRS and state tax authorities neglected to audit their tax returns or otherwise failed to discover that they had engaged in the Homer strategy.

After learning of an IRS audit for the 2001 tax year, the plaintiffs said they were forced, "under threat of being assessed even more," to pay $5.3 million in interest and penalties.


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