Sidley Austin, one of America’s largest law firms, has escaped criminal prosecution in the widely publicised KPMG tax shelters case.

US federal prosecutors said that they would not file criminal charges against Sidley Austin, despite the Department of Justice's claim that the tax shelters were established to avoid paying billions of dollars in taxes.

In exchange for not being prosecuted, Sidley Austin has agreed to pay a $39.4 million civil penalty to the Internal Revenue Service, admit wrongdoing with certain shelters and to cooperate with continuing criminal and civil investigations of other firms.

The Big Four accountancy firm KPMG was fined $456 million previously and was obliged to forego significant areas of future work to avoid criminal charges in the same case. Eighteen former partners in KPMG and associated firms still face individual prosecutions.

The decision not to prosecute Sidley Austin suggests that the Justice Department is modifying its stance toward the firms which promoted tax shelters, focusing its efforts instead on pursuing their employees. It may also show the effect of new restraints placed on prosecutors in corporate investigations. The Justice Department adopted revised guidelines for prosecutors in December amid criticism that tactics used against companies like Bristol-Myers Squibb and KPMG were coercive and unconstitutional.

The US attorney’s office in Manhattan said in a statement that it had decided not to charge Sidley Austin because the firm’s tax-shelter work was primarily carried out by a single person, a former partner and tax lawyer, Raymond Ruble.

Mr Ruble and 16 former partners of the accounting firm KPMG and one other person are set to stand trial in Manhattan federal court over their work with tax shelters. That trial may be significantly affected by another ruling on Tuesday.

A federal appellate court reversed a ruling by the trial judge, Lewis Kaplan, who ordered KPMG to stand trial over its refusal to pay the legal fees of its indicted former employees.

A ruling by a three-judge panel of the US Court of Appeals for the Second Circuit could jeopardise the government’s case against the KPMG defendants, each of whom face legal defence costs in the millions to tens of millions of dollars. In several rulings last year, Judge Kaplan had indicated that he might consider dismissing the indictment against the defendants if they were unable to pay their legal fees.

Deutsche Bank and the accounting firm Ernst & Young are also under criminal investigation. No charges have been filed against the two firms or any of their employees.

In March, Jenkens & Gilchrist, a national law firm that had also been under criminal investigation over its work with tax shelters, closed down and paid a $76 million fine after prosecutors said they would not indict the firm. In May 2006, the securities class-action law firm of Milberg Weiss & Bershad was indicted, accused of secretly paying kickbacks to plaintiffs in its lawsuits,