Baker McKenzie Pulled Into Probe of Puerto Rico Tax Shelter (1)

Federal investigators have been poring through client records of the global law firm Baker McKenzie LLP as they expand their probe of US taxpayers fraudulently sheltering income by claiming residency in Puerto Rico.

A Baker spokesperson confirmed the firm received a subpoena from the US Attorney’s office in Miami and that it is “cooperating with the government in the context of the subpoena, consistent with our client obligations.” The law firm declined to elaborate.

Baker also notified its clients who could be impacted by the probe and advised them to consider outside legal representation, according to copies of notification letters reviewed by Bloomberg Tax.

The same prosecutor’s office has in recent months sent subpoenas to tax preparers and financial professionals with clients claiming tax benefits in Puerto Rico, according to copies reviewed by Bloomberg Tax.

The subpoenas, which have not been previously reported, signal a new phase in an ongoing investigation by the Justice Department and the Internal Revenue Service into Americans sheltering potentially billions of dollars from taxes under Act 60, a statute that lures wealthy people to Puerto Rico with promises of total or near-total tax exemptions.

It is unclear how the government plans to use the information, or if Baker faces any liability in the expanding inquiry. A representative from the US Attorney for the Southern District of Florida would neither confirm nor deny the investigation.

In the only criminal prosecution related to the matter, a Florida investor pleaded guilty this summer to evading taxes on $80 million in capital gains by fraudulently claiming he was a Puerto Rico resident. Charging documents said the man, Suresh Gajwani, was aided by a lawyer and an accountant in the scheme, although neither were identified by name.

Tax dodging by Americans purporting to reside in Puerto Rico has been an IRS enforcement priority for several years.

The IRS claims it is addressing noncompliance through “examinations, outreach and soft letters.” Still, an IRS field agent last year released an anonymous letter blasting the agency’s response to tax evasion in Puerto Rico as “a clown show.” Members of Congress have also expressed frustration with the government’s lack of progress.

Two lawyers who specialize in defending clients in criminal and civil tax cases told Bloomberg Tax they’ve seen the letters Baker sent to clients.

“I have several clients who have received these letters,” said Jay Nanavati, a tax partner at Kostelanetz LLP. “Some are complying with them, and some are choosing to fight turning over their privileged communications.”

Differing Interpretations

Baker hired Williams & Connolly LLP to represent it in the probe. The law firm has sent waves of letters since last fall to Baker clients acknowledging the grand jury subpoena and its duty to turn over certain client documents to the government. The letter is signed by Williams & Connolly partner Anne M. Rucker. A spokesperson for Williams & Connolly declined to discuss its representation of Baker.

The letter said the government subpoena sought all records “pertaining to” work by two Baker partners, Jeffrey Rubinger and Summer LePree, as well as a firm paralegal. The term “records” is defined as “books, papers, documents, data, or other objects relating to Puerto Rican Tax Planning Structures.”

Rubinger and Lepree have since left Baker for the Miami office of Winston & Strawn LLP. Jed Dwyer, a defense lawyer representing Rubinger, said his client had done “nothing wrong.”

“This is apparently about an interpretation of a specific regulation in an extremely complex area of the law—and a lawyer giving an opinion on his take of that regulation,” said Dwyer, co-chair of the white collar defense practice at Greenberg Traurig LLP. “That is the job of a tax attorney.”

LePree’s counsel in the matter, David Markus of Markus/Moss PLLC in Miami, said in a statement, “Summer is a well-respected lawyer who always did what was asked of her in an ethical and professional way.”

Rubinger and LePree have a record of advising US taxpayers who shift their residency to Puerto Rico. In 2016, the pair wrote an article for the Florida Bar Journal pointing to the significant tax saving for Americans becoming bona fide residents of the island.

“These taxpayers are provided with a 100 percent exclusion from Puerto Rican income tax for all interest, dividends, and capital gains,” Rubinger and LePree, then partners at Bilzin Sumberg in Miami, wrote.

‘A Tax Scam’

Records from Puerto Rico’s Department of Economic Development and Commerce show more than 5,800 individuals have been approved for tax benefits under Act 60 and Act 22, the original 2012 program that established tax exemptions for income, dividends, interest, and capital gains for bona fide residents of the island. It is unclear how many are currently active. In addition to dropouts, the government has at times terminated people from the program.

For years, members of Congress and others have urged more scrutiny on the program and those taking advantage of it.

Sen. Ron Wyden (D-Ore.), ranking member of the Senate Finance Committee, told Bloomberg Tax the prospect that wealthy Americans can avoid taxes on their capital gains by relocating to Puerto Rico “is nothing but a tax scam.” Wyden said his staff has been conducting its own investigation into the issue.

“Stay tuned,” he added.