Paul L. Caron

Friday, June 7, 2019

Weekly SSRN Tax Article Review And Roundup: Speck Reviews Field's Tax Lawyers As Tax Insurance

This week, Sloan Speck (Colorado) reviews a new work by Heather Field (UC-Hastings), Tax Lawyers as Tax Insurance, 60 Wm. & Mary L. Rev. __ (2019).

Speck (2017)In Tax Lawyers as Tax Insurance, Heather Field explores the issuance of tax legal opinions as a form of de facto insurance against the risks of an adverse tax determination by governmental authorities. Field moves beyond the conventional framing of tax opinions as “insurance” against penalties, instead casting opinion practice as providing “a limited and conditional indemnity” to clients by way of the opinion writer’s malpractice insurance. Field contrasts this informal insurance with the burgeoning market in formal tax insurance policies, giving particular attention to intersections and entanglements that complicate the broader question of how individuals and firms address tax-related risk. Field argues that thinking about tax opinions through the lens of insurance yields insights into the value and limitations of transactional lawyering, among other things.

Field expressly eschews normative conclusions about tax opinions’ insurance function. To some extent, however, I found Field’s detailed and enlightening positive project inextricable from prescriptive or value-driven questions about tax lawyering more generally. If tax planning drives deadweight loss or complexity, then malpractice recoveries presumably subsidize bad behavior—especially if, as Field implies, tax opinions’ insurance function isn’t sufficiently priced into legal fees. Furthermore, the uncertain scope and magnitude of this insurance function—necessarily so, since data that might inform this topic are virtually impossible to gather—make normative concerns all the more pressing.

The insurance aspects of tax advice also presumably vary according to context. For me, high-quality, long-form bespoke tax opinions seem most likely to constitute insurance, either economically or in the relevant parties’ practical understanding. The representations, opinion language, and caveats often are highly negotiated, and the final product, typo-free and printed on the finest fancy paper, memorializes a deepening of the lawyer-client relationship. By contrast, my intuition is that short-form, boilerplate publicly filed opinions, almost always issued at a “will” level, have less of an insurance function. Indeed, many contractual condition or inducement opinions may fall into this second category. In addition, one might distinguish between tax shelter opinions and other written advice. Field cites reports that a small number of tax shelter opinions may drive a substantial proportion of payouts in the formal insurance market. Although the “tax shelter” category has something of a retrospective feel, the distinction seems potentially meaningful to Field’s descriptive project.

Reputations and relationships matter as well. Field’s construction of tax opinions as tax insurance depends heavily on malpractice recoveries through suit or settlement, and clients may be loath to initiate these processes, if doing so requires firing the firm, as opposed to just the tax team. Good corporate, real estate, or capital markets advice is hard to find, and clients, especially at the highest level, may feel some qualms about switching advisors wholesale. Compounding this reluctance are the facts that lawyers talk (sometimes even when they shouldn’t), and that legal communities can feel quite small. If lawyers trade on their reputations, so do clients. Another issue in opinion practice involves the (human) identity of the (corporate) client. Tax directors may push for tax opinions—and higher levels of comfort in a given opinion—to give themselves cover if things go south. During a painful and costly audit, a thick opinion from a white-shoe firm provides an excellent shield against the wrath of other executives. This aspect of tax advice—the opinion as unemployment insurance—may shape a lot of the contours that Field highlights in her analysis.

Finally, Field’s article implicates questions about privatization and tax administration. As Field notes, Treasury’s multi-decade expansion of no-rule areas has fed the demand for written tax advice and opinions. This shift doesn’t just put pressure on the insurance function of opinion practice; it also relocates many of the guardrails on tax abuse from the public sector to the private sector. Treasury essentially passes on the opportunity to shape transactions, in effect outsourcing that function to lawyers and other advisors. Tax opinions’ insurance function is an underappreciated part of this privatization process, and Field’s article represents a significant contribution to these conversations.

Overall, Field’s careful and comprehensive article yields important insight into the nature of tax advising. Lawyers, as well as tax academics, should find her analysis of vital interest in understanding opinion practice in an evolving market.

Here’s the rest of this week’s SSRN Tax Roundup:

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