Federal prosecutors in Manhattan have entered into a nonprosecution agreement with Dallas law firm Jenkens & Gilchrist over its past involvement in illegal tax shelters, a scandal that has already fatally crippled the once-thriving firm.

Between 1998 and 2003, the firm's Chicago-based tax shelter practice provided hundreds of legal opinion letters in support of tax shelters the Internal Revenue Service subsequently deemed illegal. The criminal probe of the firm by the Southern District of New York U.S. Attorney's Office followed several civil suits by tax shelter investors whose claims the firm has agreed to settle for $85 million.

As part of the agreement, Jenkens & Gilchrist will pay a $76 million civil penalty to the IRS, which estimates 1,400 taxpayers relied on the opinions. The firm also has pledged continued cooperation with an investigation of the firm or individual lawyers involved in the tax shelter practice.

The firm, which once had 600 lawyers and offices nationwide, has since lost two-thirds of its headcount and has closed several offices. In announcing the agreement today, Southern District U.S. Attorney Michael Garcia said Jenkens & Gilchrist had advised his office that it would close its last office and cease practicing law by the end of the month. Garcia said the firm's plans were a factor in its being offered the nonprosecution deal.

"The firm has acknowledged not only that its tax shelter practice was fraudulent and caused serious harm to the United States Treasury, but also that the practice caused such harm to the firm?s reputation and revenues that it cannot survive as a going concern," Gracia said in a statement. "The demise of Jenkens & Gilchrist demonstrates that a lucrative but fraudulent tax shelter practice may provide short-term financial rewards, but at great long-term cost."

In a statement to prosecutors, the firm admitted its lawyers "developed and marketed fraudulent tax shelters, with fraudulent tax opinions" and said it "deeply regret[s] our involvement in this tax practice, and the serious harm it caused to the United States Treasury."

Jenkens & Gilchrist said it had misplaced its trust in certain partners, failing to exercise proper oversight of their practice.

Paul M. Daugerdas led the firm's tax shelter practice, with partners Erwin Mayer and Donna Guerin also playing major roles. All have since left the firm. Daugerdas' lawyer, Larry Black of Austin, Texas, could not immediately be reached for comment.

Jenkens & Gilchrist closed its Washington, D.C., and Pasadena, Calif., offices late last year and earlier this week most of its remaining Chicago lawyers announced plans to join Nixon Peabody. The firm entered the New York market in 2001 through a merger with Parker Chapin & Flattau, but the 91-lawyer office departed in 2005 to launch a Manhattan outpost for Atlanta's Troutman Sanders.