Oral Testimony of Professor Bernard Wolfman

Harvard Law School

Professor Bernard Wolfman of Harvard Law School next spoke to the Commission. Before presenting his written statement he commented on two questions that had been put to Mr. Spivak. Stefan Tucker, Chair of the Tax Section, indicated in his paper that he was presenting his own view although he hoped he was speaking for the section. The ABA Tax Section of 20,000 members has never been surveyed on the subject of MDP and neither the Council of the Section nor its Standards of Practice Committee (that would initiate such a matter) have ever acted on it. Stefan Tucker spoke only for himself. Regarding the question of whether there are facts about client demand for MDPs Professor Wolfman commented to the Commission that the current issue of The Economist (the March 6 th issue he believes) reported on a survey of the 100 largest corporations in Britain that included the question of whether they favored independent law firms or MDPs; they appeared clearly to prefer law firms to remain separate as they are.

Professor Daly started the questioning by asking if there was anything, other than firm-wide imputation, that he would add to Model 4, the captive law firm. Speaking to the affiliation between a law firm and an accounting firm Professor Wolfman thinks Model 4 presents a feasible arrangement if the lawyer remains free to refer to an outside professional for specialized expertise (non-exclusive arrangement) and if there’s MDP-wide imputation. He acknowledged to Ms. Garvey that his concerns regarding availability of collaborative advice from colleagues could be diminished if the MDP’s acquisition of a law practice included the full range of legal practice and not just one specialty such as tax lawyers. He would not be at all comfortable with Model 5, an MDP with a separate law department, since despite the walls or structures that might be erected the financial interest of the owners would have a dominant and pervasive impact. The interests of the owners would permeate the structure and reach down to all personnel who would always have to work with an eye to the nonlegal business and overall profit of the MDP owners. The form doesn’t eliminate the reality of the accounting firms’ desire for financial reasons not to be subjected to the lawyer’s confidentiality or conflict of interest rules. They want to be able, in their nonlegal area, to represent clients who for a law firm would present a conflict. In Model 4, the affiliation arrangement, what is essential and should not be given up is the nonexclusivity that gives the lawyer the power to exercise independent judgment of where he should go for what his client needs. Professor Wolfman clarified to Ms. Lamm that Model 5 would be acceptable only if lawyers are in control and dominate the partnership as he pointed out that accountants are quite clearly not preparing to give up their control of the firms; it’s a question of who’s absorbing whom. Asked by Mr. Traynor if there can be such a thing as practicing "tax", and not tax law, Professor Wolfman said that "tax" in this setting is an adjective and needs a noun after it. Practicing "tax" is shorthand for tax law. Mr. Mundheim inquired whether Professor Wolfman’s hostility to Model 5 is premised on the thinking that there necessarily will be an erosion of professional values if any organization which offers legal services is not run by lawyers. Professor Wolfman said it’s right that the financial interest of owners would affect all those who work for the organization, and it’s inevitable that the financial concern of the owner is a potential interference, direct or indirect, with the independent judgment the lawyer must render for his client. Asked why the goals of lawyer owners of large law firms are different from the goals of professionals who happen to run accounting firms Professor Wolfman said serving the client and making a living are common goals; however, he thinks the lawyer’s traditions in how to serve that client are higher and better than the tradition of others. That lawyers have a firm-wide conflict of interest rule and confidentiality rule, and nonlawyer organizations do not, suggest to him that other firms are willing to place their own commercial, financial interests above what lawyers traditionally have thought must be suppressed in favor of the client. "It’s the difference in the lawyer’s willingness to put the absolute interests of the client above his own financial interests. And I just think that the resistance indicated by accounting firms to doing that says it all." Professor Wolfman responded to Dean Powell that assuring that collegiality factors are part of law practice cannot be accomplished by rule as it would be difficult to understand how to write or implement such a rule, but having lawyers work with other lawyers is a better situation for clients and the legal system than when accountants in charge of the firm think that all a tax lawyer needs is the Code and the Regulations. Asked by Mr. Rosner if having lawyer partners and managers who follow the precepts of the profession wouldn’t forestall in an MDP the one form fits all, one opinion fits all, one product fits all syndrome, Professor Wolfman said it’s possible but unlikely. He referenced his 1999 example (in his testimony) of a high-powered, highly respected former partner in a law firm, then senior official at Treasury, now partner at one of the Big Five, who spoke of the firm culture in explaining how accountants and tax lawyers in that Big Five firm are creating "products" because one shoe fits all allows them to leverage and make more money. He said a great deal is put in jeopardy if changes to the rules are made on Mr. Rosner’s optimistic assumption. Professor Wolfman, in discussing with the Chair the phases of the tax shelter industry and its products in the late ‘70s and ‘80s, said that in the end it was the ethic of the legal profession that society had come to rely on and he wants to keep that ethic. Asked if an audit of the law division of a Model 5 to keep the operation honest would alleviate his concerns Professor Wolfman said the discipline should be assessed by the state entity – the highest court of the state - that enforces the lawyers Rules of Professional Conduct against the integrated firm so the nonlawyers would also be responsible for the values of confidentiality and conflicts of interest.

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