Tax

Fierce Adversary of the IRS May Become the Agency’s Chief Counsel

Corporate lawyer B. John Williams nominated to be IRS's top enforcement chief.
CFO.com StaffAugust 14, 2001

Corporate-tax attorney B. John Williams Jr. waged a pugnacious campaign against the Internal Revenue Service six years ago that infuriated some government lawyers, who questioned the propriety of his team’s tactics.

But now, in a major role reversal, Williams could soon become the IRS’s chief enforcer in tax disputes, according to the Wall Street Journal. President Bush has nominated the 51-year-old lawyer to be the IRS’s chief counsel.

The controversial maneuvers occurred in a case in which he sought to justify disputed tax credits claimed by his client, Shell Oil Co., a unit of Royal Dutch/Shell Group. He and a Shell in-house lawyer used a private investigator to dig up dirt on a crucial government witness, and Williams later used the information to suggest the expert might be a crook. The Justice Department eventually determined the allegations to be false, and government lawyers, incensed by the tactics, urged the witness to file a defamation lawsuit, according to court papers. Shell paid a six-figure sum to settle the defamation claim, lawyers involved in that case told the Journal.

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The private investigator in the Shell case, Michael J. Russell, laughed when told during an interview with the Journal that the Bush administration had chosen Williams to run the IRS legal department. “Can you put that down as my comment?” he asked. “Mr. Williams and the IRS were not exactly on good terms the last time I talked to him,” he added. “It’s a perfect example of how life goes in full circles.”

Williams, who worked at the IRS and Justice Department during Ronald Reagan’s first term before being appointed to the U.S. Tax Court in 1985, declined to comment to the newspaper on the Shell case. Currently a Washington partner at the law firm Shearman & Sterling, he is regarded as a reliable conservative on tax matters. His nomination would require Senate confirmation.

A Bush administration official told the Journal Williams merely was “doing the work his client asked him to do,” adding that the idea for the investigation was Shell’s, not Williams’s, and that Williams was justified in relying on Russell because he had provided other information that proved accurate in the Shell case.

Shell “had hired a reputable private investigator, [and] it had relied in good faith on information provided to the investigator, which later turned out to be incorrect,” retired Shell Vice President Steven Stryker, who was involved in the tax case, told the Journal. Shell made “an honest mistake” that it later apologized for, he said.

Court files obtained by the Journal provide extensive details of the case, says the paper, and suggest Williams was an active participant in the effort to discredit the IRS witnesses in Shell’s case. For example, in a 1998 affidavit in the lawsuit the expert witness eventually filed, Williams said he and his Shell co-counsel, Charles Herpich, jointly asked Russell to conduct the background investigation on the key witness, and jointly asked for the search for overseas accounts. Several of the investigator’s progress reports responded to requests for more details from Williams, according to letters Russell wrote to the lawyer.

It is rare for an official to join an agency after participating in an incident that generated such bad feelings.

Shell launched its legal attack against the IRS in 1993. In the case, Shell sought to establish that it was entitled to a Carter-era energy-tax credit for producing oil from hard-to-mine formations called tar sands. But the IRS rejected Shell’s argument, saying the company was claiming the credit for what amounted to ordinary oil production.

Shell subsequently sued, and sought to undermine the credibility of five expert witnesses the agency hired by retaining Russell, a private investigator from Annandale, Va. Because several of the witnesses had lived overseas, Shell’s lawyers asked Russell to find out whether the experts owned any overseas accounts.

Russell eventually amassed a list of 21 offshore accounts containing $1.4 million, reports the Journal, and claimed to have information linking them to the main witness, Charles Connaughton, plus additional accounts allegedly held by the tax agency’s other experts. As Shell’s trial in federal district court in Delaware wound down on the afternoon of Sept. 19, 1995, the legal team began to ask Connaughton if he owned such accounts and whether he reported them for tax purposes.

Instantly, U.S. District Judge Joseph Farnan halted the trial and advised the shaken Connaughton to go home and hire a criminal-defense lawyer that night. “The only person I would talk about it with is a lawyer experienced in federal criminal tax matters,” he said, according to transcripts contained in the file of Connaughton’s subsequent defamation case.

Justice Department lawyers, who represented the IRS at the Shell trial, were fuming. “I have never been in a case where this has been done, except by these people,” one groused in the judge’s chambers, according to the transcripts.

After a sleepless night, the then 60-year-old Connaughton — a petroleum engineer and consultant — told the judge he would waive his Fifth Amendment rights and testify. He denied any interest in any of the 21 accounts, and did it so convincingly that Judge Farnan later confided in chambers that he considered Connaughton “innocent” and “home free,” according to the transcripts.

Later, Judge Farnan ruled that Shell wasn’t entitled to the credit, and his decision was upheld by the Third Circuit U.S. Court of Appeals in Philadelphia.

Despite Judge Farnan’s indications that he doubted Connaughton had done anything wrong, Williams forwarded the investigator’s information to Justice Department tax lawyers involved in the case, writing that it involved “potential criminal activities” by the witnesses. Williams and other Shell representatives said later that they were merely responding to the judge’s request. But partial transcripts in Connaughton’s defamation case in Houston show Williams was pressing the matter, according to the Journal. “I guess what I would like to know is, what should we do with that information, basically?” Williams asked the judge in chambers moments after Connaughton’s testimony.

When IRS and Justice Department officials looked into Russell’s allegations, they found they didn’t hold up. The offshore accounts, lawyers from the Justice Department tax division concluded in court papers in 1996, “simply did not exist.” Williams later told the Journal he wasn’t sure the private investigator’s information was conclusively disproved in all respects by the government’s subsequent probes. Russell said he obtained the information through other private investigators with whom he had had extensive dealings, including a firm in California, and he believed the information to be accurate and reliable.

Connaughton eventually filed his defamation suit in 1996, naming Williams as one of the defendants. In depositions and other statements in the case in state court in Houston, Williams maintained he did nothing wrong in raising the allegations, adding that he pressed Russell to verify the allegations. Russell said he assured Shell and Williams that the information was accurate.

He also said that initial information Russell provided on other topics proved accurate, leading him to believe Russell was reliable. Russell said in a recent interview that he thought Williams and the other Shell representatives in the tax case did nothing wrong.

After three years of sometimes bitter wrangling over evidence, the Connaughton lawsuit was settled in 1999. The agreement involved no admission of liability by Williams or the other defendants. But Shell agreed to pay Connaughton a sum that wasn’t disclosed, but which two separate lawyers involved say exceeded $100,000. One person familiar with the situation told the Journal neither Williams nor his firm at the time contributed to the settlement.

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