"NEW YORK, July 29 (Reuters) - An artist and grandson of the founder of Johnson & Johnson sued the law firm Proskauer Rose on Friday for allegedly inducing him to enter into an illegal tax shelter for the firm's monetary gain.
John Seward Johnson Jr. and his wife, Joyce Johnson, said lawyers at the firm pressured them to enter into a tax-avoidance scheme that resulted in millions of dollars in unpaid taxes and penalties imposed by the Internal Revenue Service. The suit, filed in state Supreme Court in Manhattan, accuses Proskauer lawyers Jay Waxenberg and Ira Akselrad of reaping profits from the strategy while providing false assurances to clients that the tax shelter was legal.
"Defendants' fraudulent conduct was not merely directed at Plaintiffs, but was part of an ongoing scheme, directed at members of the public, to generate unwarranted and excessive fees," the suit said.
The suit alleges fraud, legal malpractice and unjust enrichment and seeks over $145 million in compensatory and punitive damages.
Proskauer Rose did not immediately respond to requests for comment. Messages left for Waxenberg and Akselrad were not immediately returned.
Lawyers from the firm first approached the Johnsons in 2000 with a legal strategy for selling their substantial holdings of Johnson & Johnson shares without incurring any state or federal taxes, according to the complaint.
In an early meeting with Waxenberg, Akselrad and a financial adviser from The Diversified Group Inc., the Johnsons explained that they had "no present need, plan or intention to sell" their shares, the suit said. But the advisers convinced them the strategy was safe and offered only to Proskauer's "favored clients."
The intricate strategy required the creation of four limited-liability companies, the transfer of shares into those LLCs in exchange for membership interests, and then the sale of those membership interests to a third-party company set up by Diversified. The lawyers explained that the gains and losses from the transactions would cancel each other out, leaving the Johnsons with cash for the shares and no taxes owed, according to the complaint.
The suit said the strategy was the brainchild of Diversified, but that Proskauer lawyers earned a commission for recruiting clients to engage in the scheme. The firm earned $425,000 in fees from the transaction, according to the complaint.
The Johnsons accused the lawyers of not advising them that the shelter was not registered with the IRS and that it was similar to "listed transactions" the IRS considers abusive. They said the lawyers knew or should have known the strategy was illegal, given that the transactions had no real business purpose.
The suit also said that Proskauer issued the Johnsons a "tax opinion" that the lawyers said would insulate them from any potential penalties or liabilities. When the Johnsons became a target of an IRS investigation in 2006, they turned to the firm for representation. But Waxenberg responded that the firm was already engaged in litigation over Diversified-related transactions and could not represent the Johnsons before the IRS, according to the suit.
The complaint cited a related federal case in Massachusetts in which a judge concluded that Proskauer had an "inherent conflict of interest" in giving advice to taxpayers. That court found that Akselrad helped Diversified devise the tax-shelter strategy and agreed in advance to provide favorable tax opinions to encourage its use.
Askelrad has since left Proskauer and joined The Johnson Company Inc., the private-investment company of the Johnson family.
The case is John Seward Johnson Jr et al v. Proskauer Rose LLP et al, New York State Supreme Court, No. 652075/2011.
For John Seward Johnson Jr et al: Joseph P. Baratta of Baratta, Baratta & Aidala.
For Proskauer Rose: Not immediately available.
(Reporting by Terry Baynes)"
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