This article highlights ethical issues that might arise when representing clients with whom a lawyer has a personal connection—in short, friends and family members. In addition, it discusses issues that might arise when an appreciative client wishes to give a gift to his or her attorney. Both sets of circumstances can raise thorny ethical issues that are illustrated here in three hypothetical scenarios.
Behaving ethically is simple: Just do the right thing, right? As a preliminary matter, a brief overview of the applicable rules is in order. There are four rules in particular that an attorney must heed when considering whether to represent friends and family: (1) a lawyer’s duty as a fiduciary; (2) the duty of independent judgment; (3) the duty to avoid conflicts of interest; and (4) the duty of confidentiality. In addition, there are specific rules addressing the receipt of gifts from a client.
Lawyers are fiduciaries, meaning an attorney is under a “duty to exercise and maintain the utmost good faith, honesty, integrity, fairness and fidelity” in dealings with clients. Hafter v. Farkas, 498 F.2d 587, 589 (2d Cir. 1974). Even if a lawyer is representing his uncle, sister, or a close friend, that individual is a client, and he or she must be treated accordingly. In addition, each client is owed a duty of independent judgment. Furthermore, a lawyer must strive to avoid conflicts of interest. The typical conflict of interest scenario involves potential conflicts between multiple clients; the clients may be adverse to each other in some way. However, a lawyer must also ascertain whether there might be a conflict of interest between herself and her client. What’s more, it is a bedrock principle of the legal profession that client confidences are protected by means of the attorney-client privilege. The ABA Model Rules of Professional Conduct provide that “[a] lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is [otherwise] permitted.” ABA Model Rule 1.6(a). Where there is a personal connection between attorney and client, the context in which the advice is sought is highly relevant.
Generally, the relationship between attorney and client is a business relationship, whereby the lawyer provides legal services to the client in exchange for a fee. It is not so uncommon, though, for clients to express their gratitude and offer a gift to their attorney. The Model Rules state that “[a] lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift is related to the client.” ABA Model Rule 1.8(c).
Below are three situations that are designed to highlight the practical application of these rules.
Hypothetical #1: The in-law outlaw. Larry Lawyer works for a tax firm in New York. Larry’s father-in-law, Philandering Phil, receives an audit notice from New York State. After looking over the notice, Larry sees that New York is claiming that Phil should be filing and paying tax as a resident of New York. Larry thinks this should be an easy case because his mother- and father-in-law live and work in New Jersey, not New York. Phil confides in Larry that for the year in question he had secretly rented an apartment in New York City for his mistress. Under New York law, if an individual maintains a permanent place of abode and spends more than 183 days in the state, he can be treated as a resident for tax purposes even if he lives elsewhere. Phil maintained the apartment, but he spent fewer than 183 days in the state. Phil claims the relationship has ended, but he would like to fight the audit because the state is seeking to assess a hefty tax liability. Larry, worried about the impact this may have on his family, thinks Phil should consider quietly paying the tax, and, if he hasn’t already, giving up the apartment. This situation raises a host of ethical issues for Larry. To begin with, does Larry owe his father-in-law a duty to fight the audit rather than to allow his own personal interests to interfere by suggesting that Phil just pay the tax? Must Larry keep his father-in-law’s indiscretions a secret from his own wife? From his mother-in-law? Among the many issues presented, Larry must consider whether this is a jointly filed tax return. If it is, does the mother-in-law bear liability for the additional taxes? Can Larry even represent his father-in-law or should he refer him to another firm? If Larry doesn’t represent Phil, is he bound to protect Phil’s secrets then?
Hypothetical #2: With friends like these. Counselor Chris has served as outside tax counsel to Widgets Corp. for the better part of ten years, in large part because his former college roommate, Dishonest Dan, is the company’s CFO. The Internal Revenue Service has initiated an income tax audit of the company, and Dan calls Chris for help. Dan confides in Chris that he had secretly “cooked the books” for three quarters in 2008 because he needed to improve earnings to obtain financing. The Service will be visiting the company tomorrow morning to audit the 2007 and 2008 tax years. Dan is not the only one with a problem in this scenario. Chris’s close friend and longtime colleague has committed malfeasance and has confided in him. But who is Chris’s client? Can Chris advise both Dan and the company under these circumstances? Can Chris disclose Dan’s wrongdoing to the company’s CEO? Must he? In addition to the ethics rules, are there applicable securities laws that might affect the outcome?
Hypothetical #3: Don’t look a gift horse in the mouth. Alyssa Attorney is a partner in a white-collar criminal defense firm. Against the odds, she mounted a brilliant defense and successfully represented a taxpayer, No-Records Ned, in a criminal tax evasion trial. The trial team beat back all charges and won an acquittal for Ned. At the conclusion of the engagement, Ned paid all the fees and costs that the firm billed him. He then meets Alyssa for a thank-you lunch, where he appreciatively hands her an envelope stuffed with cash. Ned tells Alyssa that this is a gift just to her and not to the firm because he truly appreciates her hard work. Can Alyssa accept the gift? Does it matter whether Ned is giving her $200, which is comparable to an expensive dinner? What if Ned handed Alyssa $2,000? Or $20,000? Instead of cash, what if Ned handed Alyssa the keys to a new Porsche? Under her partnership agreement with her firm, what duties does Alyssa owe to her partners? Should she disclose the gift? Would it matter if Alyssa was an associate rather than a partner of the firm? Is this really a gift, or should she report the value of the “gift” as income on her tax return?
Conclusion. The three scenarios above have been intentionally painted with a colorful brush. But very often these same issues will arise within the more common cases that lawyers encounter day in and day out. Spotting the issues and addressing them head-on is important. Careful attention to ethical rules, along with a healthy reliance on the “smell test,” should keep practitioners within the bounds, out of trouble, and on the right side.
More Information About the Section of Taxation
This article is an abridged and edited version of one that originally appeared on page 1 of Section of Taxation NewsQuarterly, Spring 2011 (30:3).
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Periodicals: NewsQuarterly, quarterly newsletter; The Tax Lawyer, quarterly journal; monthly e-Newsletter; The Practical Tax Lawyer (published by ALI-ABA in cooperation with the Section), subscription available to Section members at a discount.
Books and Other Recent Publications: A Practitioner’s Guide to Innocent Spouse Relief; Careers in Tax Law; Effectively Representing Your Client Before the IRS, 5th ed. (forthcoming, Fall 2011); Property Tax Deskbook, 15th ed.; Sales & Use Tax Deskbook, 24th ed.; The Supreme Court’s Federal Tax Jurisprudence: An Analysis of Fact Finding Methods and Statutory Interpretation from the Court’s Tax Opinions, 1801–Present.