Paul L. Caron

Friday, May 30, 2008

Fortune: The Role of Expert Opinions in the Tax Shelter Problem

In today's Fortune:  Blowing the Whistle on Unethical Lawyers; Legal Professor William Simon Aims to Shame Colleagues Who Sell Their Opinions for the Right Price, by Roger Parloff:

In a forthcoming Stanford Law Review article titled The Market for Bad Legal Advice:  Academic Professional Responsibility Consulting as an Example, Columbia Law School professor William Simon cites [examples of] patently bad advice offered in exchange for lucrative compensation by academics whom he contends are becoming "enablers of pernicious... practices." ...

Simon's article, the "take-no-prisoners" tone of which left me slack-jawed, contends that there is a systemic, recurring problem that arises when well-heeled clients go shopping for expert exonerations -- sometimes prior to doing something shady, sometimes after they've already done it -- to immunize themselves from civil liability or criminal prosecution. ... He cites the example of lawyers at another law firm who "gave hundreds of opinions to taxpayers to the effect that bizarrely complex and economically substanceless transactions ... were acceptable ways to reduce taxes. Some of them were virtually copies of transactions that the IRS had specifically condemned." ...

Simon's article seeks not just to diagnose the problem but also to prescribe and administer remedies. The most controversial will surely be the measure he calls "shaming." That process consists of having other academic ethics experts -- like Simon -- write law review articles brutally critiquing the opinions that their colleagues have offered while under retainer. This, he believes, will help deter the delivery of bad advice. ...

Here's Simon's theory as to how tainted advice is born: Clients ask lawyers to provide opinions that they plan to show to someone else -- like a regulator or jury -- if the client's conduct is challenged. A clear example is where the promoter of a dicey tax shelter offers a boatload of money to a law firm to opine that its Rube Goldberg-style investment has a genuine "business purpose" and should, therefore, pass muster with the IRS.

The letter is initially shown to prospective tax-shelter investors for marketing purposes, but otherwise remains confidential. If, however, the investors who sign up get audited and the IRS determines the tax shelter is bogus, the opinion letter remains valuable. That's because the investor can still wave it in the face of the IRS auditor and say, "How should I have known it was illegal? Such-and-such big-name law firm told me it was fine. Here's their letter!"

At least until 2004 -- when tax laws were modified to address abuses -- the erroneous letter would typically suffice to immunize the taxpayer from both civil penalties and criminal prosecution.

The problem is even worse, Simon contends, when the client seeks a self-serving opinion not from a law firm but from an ostensibly above-the-fray law professor. "The norms of the academy regard openness and transparency as an essential guarantee of the reliability of a scholar's views," Simon writes. But these norms do not pertain in litigation contexts. On the contrary, rules of confidentiality give the client control over the opinion's release, and generally bar the expert from otherwise discussing the matter.

The academic "invokes the authority of her role and institution as emblems of both acuity and impartiality," writes Simon, "yet she forswears the norms of openness that the academic world regards as essential to such claims." ...

I am now sufficiently old and decrepit to describe myself as a longtime observer of the American legal system. For what it's worth, I find Simon's analysis of what's wrong with legal ethics testimony to be not just dead-on, but cathartically so. How gratifying to finally hear someone speak truth to power so bluntly, boldly, and persuasively. The ethics emperors have no clothes on, and thank goodness the socially oblivious little boy has finally said it.

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