October 05, 2011

Written Remarks of James P. Holden

I have been asked to provide a statement to the Commission relating to the newly enacted tax practitioner-client privilege, the employment of lawyers by accounting firms, and the developments in the delivery of legal services outside the United States by accounting firms. I have also been asked to present suggestions in the event that the Commission decides to recommend a relaxation in the rules restricting partnerships and fee-sharing between lawyers and nonlawyers.

Although I have represented accounting firms with regard to various professional responsibility matters, neither I nor my firm has any engagement from such a firm that relates to the present subject matter. /1/


This privilege was enacted as a result of the combined effect of two forces, one profession-oriented and the other consumer- related. First, the AICPA did a very effective job of convincing legislators that fairness requires a leveling of the playing field for professionals who represent clients in the tax marketplace. Second, legislators accepted the proposition that consumers of professional tax services are entitled to assurance that communications with their tax advisors will not be disclosed to the IRS regardless of the professional affiliation of the advisor.

The ABA played no effective role in the legislative effort. No action was taken during the consideration of the proposed legislation in the U.S. House of Representatives. After the bill reached the Senate, a statement was submitted over the signature of the president of the ABA in which various technical and policy problems in the pending legislation were identified. However, the ABA had virtually no impact on the legislation.

The new privilege will probably achieve its intended purpose to protect most forms of tax advice provided by tax practitioners who are not engaged in the general practice of law. It suffers from two kinds of uncertainties. The first kind consists of the uncertainties that are inherent in the existing attorney-client privilege. /2/ The second kind consists of uncertainties that result from legislative tailoring to restrict the new privilege to the tax setting, a venue that is substantially more limited than that of the attorney- client privilege. These latter kinds of uncertainty include the restriction of the privilege to communications of tax advice, /3/ the restriction of the privilege to tax proceedings, /4/ the denial of privilege in criminal matters, /5/ the denial of privilege for certain forms of corporate tax shelter activity, /6/ and the limitations imposed by an effective date. /7/ These uncertainties will be addressed by the courts in summons enforcement cases and in discovery and evidentiary rulings and will, over time, be resolved. Ultimately, however, it is likely that the privilege will serve its intended purpose.

To my knowledge, accounting firms have been circumspect with regard to the availability of the privilege. While delighted to have it, they have not trumpeted it in a competitive context. The AICPA has produced a video program for use by accounting firms in training their staff personnel with regard to the privilege. The larger accounting firms have developed their own training materials, both for their staff personnel and for their clients. Caution, rather than aggression, seems to be the current byword.


Accounting firms continue to attract lawyers to practice with them. Many of these lawyers are highly qualified and have had significant private practice and/or government experience. This is particularly true in the tax field but is also the case in areas such as corporate and employee benefits. These lawyers are now widely engaged in legal planning and opinion writing. It is only natural that the accounting firms will aspire to engage these lawyers even more fully in the practice of law, including ultimately the representation of firm clients in court. /8/ In that objective, they will be supported by their clients, who wish to be able to utilize the services of the lawyers of their choice, whether those lawyers are affiliated with law firms or accounting firms.

The individuals in question are lawyers and, as a group, appear to be as well qualified in their areas of practice as lawyers practicing in law firms. The only factors that now restrict them from holding themselves out as engaged in the practice of law are the rules of professional responsibility and unauthorized practice statutes adopted in the various states. /9/ Those restrictions will come under pressure as the professional and consumer forces that resulted in the new tax practitioner-client privilege are asserted in this area. While the tax practice area may be the first frontier in which change will be sought, it will certainly not be the only practice area targeted by firms not controlled by lawyers.

It is my understanding that accounting firms maintain that they are not engaged in the "practice of law" and that their lawyers are thus not bound by the rules of professional responsibility applicable to lawyers who are so engaged. However, if being subject to such rules were the price of being allowed to engage in the practice of law, it seems likely to me that accounting and other professional service firms would be willing to take that step. However, there may be limitations to this willingness. For example, it is open to question whether such firms would ever adopt conflict of interest principles quite as extensive and as torturous as those that the bar has imposed on itself.


With regard to activities outside the United States, I have no direct personal knowledge, but the literature is surely replete with discussions of the extent to which firms other than law firms are now extensively engaged in the practice of law in foreign countries. This fact represents just one of the pressures that will continue to build in favor of easing the existing restrictions on such practice in the United States.


As previously noted, economic and professional pressures will almost certainly compel some form of change in the rules regarding lawyer/nonlawyer affiliation in the near future. In the face of this reality, the organized bar must determine what course of action it will take. Three broad avenues are available. First, oppose any change. Second, stand idle and observe developments. Third, anticipate the inevitability of change and attempt to shape it constructively. In my view, only the last alternative is responsible. Opposition will not long deter the forces that seek change because the opposition will be regarded as arising only from self-interest. Idleness in the face of fundamental change would be the height of irresponsibility. By anticipating the changes and by seeking to influence them constructively the organized bar best protects the interests of the public and of its lawyer constituency.

It seems evident that mere tinkering with the Model Rules will not suffice to meet the need for change. More imaginative action is required. The 1982 Kutak Commission formulation of Model Rule 5.4, rejected in 1983 by the House of Delegates, would have allowed lawyers and nonlawyers to participate in law practice so long as all participating lawyers met their professional responsibilities under the Rules. If Model Rule 5.4 were amended to reflect the Kutak formulation, lawyers affiliated with accounting and other firms would be able to engage in the practice of law. While that might seem at first blush a reasonable solution, it would not be adequate to the present situation. First, the amended Rule 5.4 would be effective only in those states that chose to adopt it. At best, the adoption process would be long and uncertain. Second, even if the amended Rule 5.4 were to become widely adopted, it is almost inconceivable that 51 individual jurisdictions could effectively exercise regulatory control over professional service firms offering a combination of law and other services on a national and international basis. If fundamental change is to occur in this area, it is vitally important that the resulting regulatory structures be capable of providing effective protection to consumers of professional services.

Different models for effectuating change can be conceived. One such model might involve federal legislation that would create a federal level commission ("the Commission") responsible for regulating professional service entities. This system of regulation would be elective in the sense that those lawyers who wished to remain subject to state regulation would be entitled to do so, continuing as before to observe the professional rules of their jurisdiction. On the other hand, those lawyers, other service providers, and firms who chose to do so could elect to become subject to the regulatory jurisdiction of the Commission. The Commission would regulate all professional services offered by an electing firm, whether those services consisted of law, accounting, engineering, economics, etc. The commission would adopt rules of professional responsibility applicable to all disciplines within its regulatory jurisdiction; the rules for lawyers could, for example, be based on the Restatement of the Law Governing Lawyers, adopted in 1998 by the American Law Institute. In addition, the Commission would determine whether a single service firm would be entitled to offer all forms of service. For example, the Commission might evaluate whether the tension that exists between the disclosure obligations of an independent auditor and the confidentiality obligations of an advocate preclude a single firm from providing both kinds of service. The Commission might also consider whether there is a need to impose limitations on the permissible ownership of professional service firms subject to its jurisdiction. The Commission would also address issues related to admission to practice; it could rely on the states for initial testing and admission of professionals or, alternatively, it might administer its own testing and admission procedures. The principles underlying these forms of regulation would be consumer protection and the efficient delivery of professional services.

This new federal system of regulating professional services for electing firms would preempt state regulation of the same subject matter for those firms. However, state regulation would continue to be effective for nonelecting lawyers. The nature of the practice of electing firms would be inherently national and international in scope, and thus the system should lie within the regulatory jurisdiction of the Federal government.

This concept is offered primarily to stimulate thought and to encourage evaluation of solutions that go well beyond mere adjustments to the Model Rules. The issues that the bar faces require a willingness to consider new ways of thinking about old problems. If the model suggested here contributes to that dialogue, it will have been successful.


/1/ The views herein expressed are those of the author and not of his law firm, the American Bar Association Section of Taxation, or any other entity with which the author is affiliated.

/2/ Significant among these are difficult concepts of waiver. For example, what are the limits on disclosures of privileged information within the lawyer's firm that may occur without risk of waiver? Although disclosure within a law firm has not generally been thought to waive privilege, the sheer size of some of the firms who may benefit from the new privilege raises the question whether this principle will have to be revisited.

/3/ If a written communication includes both tax advice and other advice, is only the tax advice portion protected, or does the entire document lose privilege? If the former, is the IRS entitled to receive a redacted version?

/4/ Communications with tax advisors will not be protected from disclosure in proceedings before any other federal agency (thus, for example, the chairman of the SEC is free to obtain what the Commissioner may not), in civil litigation, and in state tax or other proceedings. This restriction raises difficult and uncertain subject matter waiver issues.

/5/ If communications were protected prior to a civil examination turning criminal, do they lose protection once criminal proceedings commence? If a criminal proceeding is followed by a civil proceeding, may privilege be reasserted?

/6/ The privilege is not available for written communications in connection with the promotion of the participation of a corporation in a shelter. Given the very broad definition of "tax shelter," there are many uncertainties inherent in this restriction.

/7/ The privilege is available only for post-enactment communications. Will the fact that pre-enactment communications on the same subject matter have been disclosed result in a holding of subject matter waiver with regard to otherwise privileged post- enactment communications?

/8/ While it is often suggested that it should be easier for accounting firm lawyers to gain access to the Tax Court than to other courts, that appears to be an erroneous premise. CPAs enjoy no special status concerning admission to the Tax Court. Section 7452 provides that no person shall be denied admission by reason of lack of professional standing. However, while the Tax Court rules provide for admission of lawyers, they require that any nonlawyer (including any CPA) successfully pass an examination as a condition of admission. In fact, very few nonlawyers have passed the examination and are admitted to practice before the Tax Court. Thus, as a practical matter, practice before the Tax Court is conducted exclusively by lawyers. If lawyers employed by accounting firms may represent firm clients before the Tax Court, it would appear that they may also represent firm clients before other courts because there is no fundamental difference between a lawyer's qualification for admission to the Tax Court and a lawyer's qualification for admission to any other court.

/9/ Rule 5.4 of The Rules of Professional Responsibility as adopted in the District of Columbia do allow nonlawyers to have a financial interest in a law firm. However, the Rule requires that the sole purpose of the firm be to provide legal services, that all persons having a financial interest agree to abide by the Rules, and that the lawyers having a financial interest undertake to be responsible for the conduct of the nonlawyer participants. This Rule, while of some benefit to purely local firms, is not of use to firms that maintain offices in other jurisdictions, given the fact that no other jurisdiction has adopted a similar rule.

The views expressed herein have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and, accordingly, should not be construed as representing policy of the American Bar Association.