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Tax Schemes and Legal Malpractice

Will an attorney who created tax evasion strategies for his wealthy clients, also be liable for legal malpractice by providing to his clients a scheme that broke the law?


Federal court files injunction against Chicago attorneyProsecutors allege Gary J. Stern designed tax-fraud schemes

November 7, 2013, By Jared S. Hopkins, Chicago Tribune,

A Chicago attorney specializing in tax law has been barred from preparing most tax returns for anyone other than he and his family, following allegations that he helped customers — including former Bear Kyle Orton and other NFL players — falsely claim more than $16 million in improper tax credits, according to court records.

Gary J. Stern consented to the civil injunction order, which was filed earlier this week, without admitting to the allegations against him.

Stern, currently at Stahl Cowen Crowley Addis LLC, is not allowed to prepare tax returns for individuals, estates, trusts, partnerships or corporations, among others, according to the order. In a 37-page complaint, federal prosecutors allege that Stern organized, operated and promoted elaborate and bogus tax schemes, primarily to help wealthy people evade federal income taxes.

According to the complaint, Stern designed at least three tax-fraud schemes that enabled hundreds of people to falsely claim more than $16 million in improper tax credits and avoid paying income tax on at least $3.4 million. While at Chuhak & Tecson, Stern promoted the schemes to customers, colleagues and business associates, according to the complaint.

The complaint alleged his customers included lawyers, entrepreneurs and NFL players, including Orton and retired stars Ray Lewis and Terrell Owens. Those players have filed separate lawsuits against Stern in connection to the tax scheme, alleging fraud and professional malpractice.

The complaint alleges that, for about a decade, Stern created a web of partnerships and companies to facilitate "sham transactions" to funnel false credits stemming from sales of fuel from alternative energy to his customers. Prosecutors alleged that he funneled bogus tax credits to customers and used a bogus trust arrangement.

Owens allegedly received the most credits of all investors in one partnership. He claimed $700,014 in credits on his 2006 federal income tax return, reducing his combined 2006 and 2007 tax liabilities by the same amount. He paid more than $400,000 for the credits, according to the complaint.

Stern, a licensed attorney since 1983, also allegedly promoted an "abusive" income-shift mechanism to help high-net worth customers illegally avoid paying taxes, according to the complaint.

Among the individuals prosecutors allege were involved with the tax credit deals is Leon Greenblatt, a maverick Chicago investor who with his partners made millions in the 1990s by trading the stock of a bankrupt company. The Tribune reported in September that over the years Greenblatt has been subject of dozens of lawsuits, filed many himself, been harshly criticized by federal judges in opinions, and that IRS agents were examining the tax credit deals linked to Stern.

Court records have shown that the IRS had also launched a criminal investigation in the tax credit deals. In spring 2011, an agent in the IRS Criminal Investigation Division tried to interview Stern, who invoked the Fifth Amendment, according to records.

Attorneys for Stern, at Monico & Spevack, could not be reached for comment.

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