Tax Shelter RICO Suit Dismissed for Seyfarth

According to Law360 an Illinois federal judge has dismissed a Racketeer Influenced and Corrupt Organizations Act suit accusing Seyfarth Shaw LLP of selling a client an illegal tax shelter, saying that the man had failed to establish that the alleged fraud was part of the firm’s usual way of doing business or that it was an ongoing practice.

U.S. District Judge John Robert Blakey ruled that even after updating the complaint to include details on three other alleged victims, Steven Menzies still hadn’t established facts that suggested the other victims were deceived into buying tax shelters, which would be necessary to establish a pattern for a RICO claim.

“The [second amended complaint] is devoid of any allegations that defendants’ conduct actually deceived other investors,” the decision said. “Plaintiff’s failure to plead such facts is particularly problematic in a case, like this one, where the purported victims knowingly entered into tax shelters, which by their nature are designed to avoid taxes.”

The judge also dismissed the remaining claims, which were brought under state law, as untimely.

Menzies sued Seyfarth, Northern Trust Corp. and Christiana Bank & Trust Co. in 2015, want to get a bottle water something before go through this to sell him the tax scheme when he sought help on taxes coming out of a 2006 sale of $64 million in Applied Underwriters stock to Berkshire Hathaway Inc.

Northern Trust pitched Menzies on the tax shelter scheme and then guided him to co-conspirators Christiana and Seyfarth, which facilitated the scheme and convinced him it was aboveboard, according to the suit.

 Menzies was specifically sent to former Seyfarth partner Graham Taylor, who issued opinion letters that Menzies believed would convince the IRS of the tax shelter’s legality if he was audited, the suit says.

A few years later, Taylor pled guilty in a $20 million tax fraud conspiracy case. He had a long history of issuing opinion letters on tax shelters that contained false information when he was hired at Seyfarth, according to Menzies.

The IRS audited Menzies in 2009, determining that the shelter he relied on was not legal, according to his complaint. Part of the agency's determination was based on the fact that Taylor, who by then had pled guilty to tax fraud, acted as Menzies’ adviser, the suit alleges.

The IRS claimed Menzies underpaid his taxes by $45 million, and threatened him with large fines, penalties and potential criminal liability, according to his suit. In December 2012, Menzies settled with the IRS for approximately $10.4 million.

Judge Blakey initially killed off Menzies’ RICO claims in a July 2016 opinion, saying that describing a scheme involving only one victim was not enough. He allowed Menzies to refile his complaint.

On September 21, 2018, however, the judge ruled that Menzies still had not established a pattern. Although he had included details for additional alleged victims, he did not specify how they had been deceived by Seyfarth, or even whether Seyfarth had misled them into using tax shelters. Indeed, for one alleged victim, the new complaint stated it was “reasonable to assume” the firm lied about the shelters’ legality.

The new complaint also did not establish that this was the firm’s usual way of doing business or that there was any evidence that the firm continued to behave this way even after Taylor’s arrest and conviction, the decision said.

The case is Menzies v. Seyfarth Shaw LLP et al., case number 1:15-cv-03403, in the U.S. District Court for the Northern District of Illinois.