Sidley Austin LLP, one of Chicago's largest law firms, averted federal criminal prosecution over the alleged fraudulent tax-shelter activities of a former partner when it agreed Wednesday to pay a $39.4 million penalty to the Internal Revenue Service. 2

Sidley Austin LLP, one of Chicago’s largest law firms, averted federal criminal prosecution over the alleged fraudulent tax-shelter activities of a former partner when it agreed Wednesday to pay a $39.4 million penalty to the Internal Revenue Service.

Sidley Austin LLP, one of Chicago’s largest law firms, averted federal criminal prosecution over the alleged fraudulent tax-shelter activities of a former partner when it agreed Wednesday to pay a $39.4 million penalty to the Internal Revenue Service.

As part of its settlement with the IRS and the Justice Department, the 1,700-attorney firm also issued a public statement of contrition, saying it “apologizes and expresses its deep regret to the United States government.”

Sidley is one of a number of legal and financial firms tarred by a scandal linked to once-popular shelters designed to help wealthy clients avoid tax liabilities.

In contrast to the other firms, however, the Chicago firm’s involvement was minimal: Sidley, in effect, purchased its tax-shelter problems when it merged in 2001 with a rival firm that had been actively involved in the questionable shelters.

Michael Garcia, the U.S. attorney for the Southern District of New York and the government’s lead prosecutor in the tax-shelter case, noted Sidley’s involvement had been largely peripheral and also said his decision not to pursue charges reflects the fact that “prosecution of Sidley might have significant collateral consequences on partners, employees and clients of the firm.”

The U.S. government, which contends the shelters improperly made use of sham transactions, has been pursuing criminal charges against purveyors of those arrangements and seeking back payment from individuals who used them to avoid taxes.

The accounting firm KPMG, a leading promoter of the shelters, avoided criminal prosecution two years ago by agreeing to pay a $456 million penalty. That settlement didn’t extend protection to a number of former KPMG officials, who are facing trial on criminal tax-fraud counts.

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