(CN) - Multimillionaire attorneys who won massive fee awards suing Big Tobacco must pay hefty penalties for using an illegal tax shelter, the 5th Circuit ruled.
Harold Nix, Charles Patterson and Nelson Roach are partners in the law firm Nix, Patterson & Roach, which represented Texas in the state's litigation against the tobacco industry.
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.
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."
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.
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.
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