Tax Law

5th Circuit nixes tax shelter used by 3 attorneys to keep more of $600M legal fee award

After winning a $600 million attorney fee award in 1998 for representing the state of Texas in litigation against big tobacco companies, three law firm partners sought to reduce the tax bite.

But their efforts only made the situation worse: A federal appeals court last week ruled that the tax shelter deployed by the partners of Nix, Patterson & Roach was abusive, imposing a 40 percent gross valuation misstatement penalty as well as other penalties for underpaying income tax, Courthouse News reports.

There was no reasonable cause for the firm to underpay, wrote the New Orleans-based 5th U.S. Circuit Court of Appeals in its Thursday opinion (PDF), and the court lacks jurisdiction to hear arguments from partners Harold Nix, Charles Patterson and Nelson Roach about their individual good faith.

The tax shelter was considered abusive because the so-called investment plan offered virtually no chance of making a profit.

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