Oral Testimony of Samuel Sterrett - Center for Professional Responsibility

Oral Testimony of Samuel Sterrett,

Of Counsel with Vinson & Elkins

The first speaker of the afternoon was Samuel Sterrett, former Chief Judge of the U.S. Tax Court and currently Of Counsel with Vinson & Elkins. He spoke on his own behalf and was not presenting the views of either the Tax Court or his law firm. Referencing the Section 7452 Internal Revenue Code "qualified person" he explained the periodic Tax Court exam that determines admission to practice before the Tax Court. The basic Conflict of Interest provision for Tax Court litigants, Rule 24 (g) of the Tax Court Rules of Practice & Procedure, identifies three instances that require counsel of record to obtain informed client consent, withdraw or take whatever steps are necessary to obviate the conflict of interest or other violation of ABA Model Rules, if: 1) involved in planning or promoting a transaction or operating an entity that is connected to an issue in the case, 2) representing more than one person with differing interest with respect to any issue in the case, or 3) is a potential witness in the case. Prompted by the 1990 ‘innocent spouse’ IRC provision this amendment included the explanation that it was added because of the Court’s concern that the integrity of its decision not be challenged for an advocates’ conflict by a disappointed party. As a trial judge Sterrett would ask a taxpayer represented by a multi-practice entity whether the entity had prepared the return or planned the transaction that was being challenged by the IRS, whether the entity intended to call any of its employees as witnesses and whether the taxpayer appreciated that the entity represented in court would not want to admit its mistakes and may feel a need to defend its actions. That is, the entity is assuming the role in part of a principal rather than that of a mere advocate. Does the entity intend to call any of its employees or members as a witness? Is so, does the taxpayer appreciate the fact that the trier of fact will be concerned about giving the full weight to the witness’ testimony, where he or she realizes that the witness and the advocate are all part of the same entity, with a common ax to grind. Ensuring that a taxpayer understood the appearance of conflict concerns would ensure that her waiver was based on informed consent. He expressed a concern that conflicts of interest are inherent in a multi-practice entity rendering professional services; a client may not be protected by an advocate who does not owe her undivided loyalty. Conversely federal courts appear to be interpreting conflict of interest rules very strictly as demonstrated by the 5 th Circuit case, In re American Airlines, Inc. AMR Corporation, 972 F. 2d 605 (5 th Cir. 1992) which found his law firm disqualified from representing Northwest Airlines because of its prior representation of American Airlines. The Court found ‘irrebuttable’ the ‘presumption that confidences obtained by an individual lawyer will be shared with the other members of his firm’. Commenting that there are no comparable strictures binding on others rendering professional advice, Sterrett acknowledged that with a global practice the number of lawyer conflicts will grow exponentially. Characterizing the conflict of interest problems as a matter of consumer protecting rather than turf protecting he urged the legal profession to work with the AICPA to develop uniform, definitive rules of engagement that assure undivided loyalty to clients. The ABA could ask Congress to authorize a broad-based national multidiscipline practice commission that would study the issues and recommend legislation to regulate the practice on a national basis. This suggestion is similar to Jim Holden’s recommendation from the November hearing. State-by-state regulation is not feasible and would create a nightmare for practitioners.


Professor Daly had the former Chief Judge clarify that if ABA rules were to allow fee-sharing with nonlawyers the Tax Court rules would pick up the change by its cross-reference. He said that in checking with the current Chief Judge no one up until today has made an issue of splitting fees with nonlawyers. Sterrett acknowledged that he had not run into any attorney conflict of interest while on the bench but he qualified his response by saying that a conflict may not be apparent to the court at the trial level and that lawyers in accounting firms representing clients in court were not much of an issue ten years ago when he left the bench. Asked by Professor Hazard if he thought a law firm should be able to defend in court a document it prepared, Sterrett said the judge would ask the client if he or she were aware there is a potential conflict. Judge Friedman commented that a lawyer should comply with the rules of the forum he practices in no matter the practice structure of his firm. Professor Haddon asked his proposed federal legislation’s area of regulation and Sterrett supported an opt-in mechanism. She expressed incredulity as to whether accounting firm lawyers realize the malpractice implications of multidisciplinary conflict as a law client who loses and uncovers a conflict, that in a large entity will be quite easy to do, will hold the lawyer accountable. Professor Hazard said the irrebuttable presumption of the American Airlines 5 th Circuit case derives from the ABA rules as the profession has imposed imputation on itself. No other profession has it. He suggested that, as Texas has done in its domestic rules, confidentiality, loyalty and competency be observed internally within insulation walls as regards the specific client and there would be no conflicts problem. In response to a question from the Chair, Sterrett said he, as the judge, would raise a conflict of interest question before start of the proceeding. In Practice Rule 24 (g) only two of the three items can be waived by the client; the lawyer as potential witness requires withdrawal. Mr. Sterrett agreed with the Chair that as Rule 201 of the Tax Court mandates that Tax Court practitioners carry on their practice in accordance with the ABA Model Rules the Tax Court’s failure to enforce its rules would allow a losing litigant to complain to the Court why it failed to enforce its own conflicts rule. He also mentioned that a change in the ABA rules should be brought to the attention of the Chair of the Tax Court rules committee.