Summary of the Testimony of Linda Galler

Before the Multidisciplinary Practice Commission

After lunch the Commission heard from Linda Galler, Professor of Law at Hofstra University School of Law, who addressed the differences between standards of professional conduct that apply to lawyers and those that apply to accountants. Lawyers are zealous advocates whose primary duty -- to the client -- is reflected in the obligations of loyalty and confidentiality. Accountants' primary duty is to the public and is expressed in terms of independence, objectivity and integrity. These different approaches result in different rules that reach different results under similar facts. To illustrate, Professor Galler posited an accounting firm's representation of several parties to a corporate acquisition and the rendering by the firm of a single tax opinion letter to all of the clients. While such a scenario would be unlikely to occur in a law firm, accountants are permitted to simultaneously represent two or more parties to a transaction so long as the accountants believe that their ability to act objectively will not be impaired (and the representation is disclosed to, and consented to by, the clients).

Professor Galler noted that lawyers and accountants engaged in tax practice are governed by a federal regulation, Circular 230, in addition to professional regulations in states in which they practice. Circular 230, which is administered by the Director of Practice of the Internal Revenue Service, is important both because it applies uniform standards to lawyer and nonlawyers and because the IRS appears to be more interested in policing professional ethical violations in the tax area than are state bar disciplinary authorities.

Professor Galler argued that the lawyer's duty of confidentiality cannot coexist with an accounting firm's attestation function. For example, if lawyers in the tax department of an accounting firm acquire knowledge about a client's tax or financial situation and that information could be relevant to the client's financial statements, which the same firm is preparing, one would suspect that the tax department lawyers would have to turn the information over to the auditors for evaluation and possible disclosure. Professor Galler queried how an auditor's obligation of disclosure could coexist with any reasonable expectation of privacy on the part of a client. Lawyers in accounting firms claim not to be subject to the duty of confidentiality because they claim not to engage in the practice of law, an assertion that Professor Galler questioned.

Professor Galler addressed some of the ethical issues raised when accounting firms render litigation services. For example, a lawyer no matter who her employer - must rely on her bar admission to represent clients in Tax Court and, thus, acts in her capacity as a lawyer. Arguably, such a lawyer violates Model Rule 5.4, which prohibits lawyers from providing legal services under the control of a nonlawyer or splitting legal fees with a nonlawyer, a position adopted by the ABA in Informal Opinion 1032. A second ethical issue is presented by taxpayers' ability to institute civil tax litigation in any of three forums: the Tax Court, a U.S. District Court and Court of Federal Claims. Advice on proposed tax litigation should perhaps must include the relative advantages and disadvantages associated with each forum. First, analyzing precedent in each of the possible forums (which may, and often do, vary) and advising a client on the optimal choice must be the practice of law. Second, the accounting firm is permitted to represent a client only in the Tax Court and its financial incentive (in the form of lost fees) to advise the client to select Tax Court (rather than the other two forums and an outside lawyer) creates a conflict of interest. Third, if the accounting firm prepared the return that is being litigated in Tax Court the firm might prefer to have its position vindicated in order to protect itself from potential future liability to that client, as well as others, rather than settle or dispose of the litigation without establishing the correctness of the issue in question. Similar conflict of interest issues arise if the firm participated in tax planning regarding items claimed on a litigated return; in such a situation Tax Court Rule 24 (f) requires counsel of record either to withdraw from the case or to take steps to obviate the conflict. Fourth, if accounting firm lawyers claim not to practice law they cannot claim an attorney-client privilege, but (with the enactment of I.R.C. '7525 earlier this year) they can claim the more limited tax adviser privilege, with its >corporate tax shelter' communication exception. On the assumption that clients are better off with the full protection of the traditional lawyer-client privilege, what is the likelihood that clients will be confused or misled? As both privileges apply only when the lawyer or tax adviser gives legal advice, and not business advice, how or where will the line be drawn or be understood by clients - between privileged legal advice and nonprivileged business advice?

During questioning Judge Friedman asked about the possibility of disclosure to the client, on the order of SEC regulations, to distinguish the protections provided by a lawyer and those provided by an accountant. Responding to a choice of tax litigation forum question, Professor Galler explained that not all forums afford a right to a jury trial or compute tax liability comparably so that full disclosure would have to include all of the trade-offs among the three courts, but she added that a client's informed choice should decide all representation issues.

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