Grant Thornton US to pay $100m in damages over tax shelter

Grant Thornton US has been ordered to pay $100m in damages after selling a tax shelter to clients which allowed funds held in Cayman Island-based companies to be distributed to shareholders in the US without federal tax liability.

Grant Thornton US sold the tax shelter, which was later disallowed by the Inland Revenue Service (IRS), to its clients William and Martha Yung and the 1994 William J. Yung Family Trust in 2000. The Yungs settled with the IRS in 2007.

The tax shelter, known as Lev301, was developed by Grant Thornton in 2000 as a strategy designed to allow corporations to make certain types of monetary distribution with minimum tax consequences to their shareholders.

After selling Lev301 to the Yungs, Grant Thornton then sold it to 13 other clients and a similar product to 22 other customers.

Following the settlement with the IRS, the Yungs took action to recoup roughly $20m, the combined total paid to the IRS in back taxes, interest and penalties, and the fees it paid to Grant Thornton.

The trial court found Grant Thornton liable for fraud and gross professional negligence in the sale of Lev301 and awarded $20m in compensatory damages to the Yungs and $80m in punitive damages.

Grant Thornton appealed this decision and the Court of Appeals reduced the amount Grant Thornton needed to pay in punitive damages to $20m. It found that the punitive damages in excess of $20m to be unreasonable and exceeded the amount justified to punish and deter Grant Thornton from similar behaviour in the future.

The Yungs then sought to reinstate the initial $80m to be paid in punitive damages. The Supreme Court of Kentucky then upheld the initial court’s decision and reinstated the original $80m of punitive damages to be paid.

In 2018, Grant Thornton US had a fee income of $1.7bn.

Grant Thornton US told IAB: "Grant Thornton is disappointed with the most recent decision regarding this matter, which dates back almost 20 years, and is reviewing its options for appeal."