PROBATE CORNER
Attorneys Liability To Third Parties For Sanctioning Listed Transactions
DAVID M . GARTEN
If it ’ s too good to be true , then it ’ s not ! On the advice of their attorneys and accountants , taxpayers invested in tax-planning strategies that generated huge tax losses to offset sizable taxable gains without any significant economic risk . The nation ’ s leading law firms , accounting firms , and banks endorsed these transactions and propped them up with legal opinions , thereby creating an air of legitimacy around them . Comforted by the trappings of lawfulness , taxpayers jumped at the opportunity to reduce their taxes , paying considerable fees in the process .
As the IRS learned of these techniques , it categorized them as “ listed transactions ” ( https :// www . irs . gov / businesses / corporations / listed-transactions ) and disallowed punitive losses associated with their use . A listed transaction is defined in Regs . Sec . 1.6011- 4 ( b )( 2 ) as a transaction that is the same or similar to one that the IRS has determined to be a tax-avoidance transaction and identified in a notice , regulation , or other publication . Many professionals scoffed at these IRS notices and their supposed application to the tax shelters in question . In some instances , these professionals did not immediately inform taxpayer clients of the IRS ’ s position . In other instances , they made disclosures but insisted that the nature of the purchased tax shelter was distinguishable from those shelters described in the IRS notices .
Once the taxpayer client receives a notice from the IRS informing him that the tax benefits claimed are not allowable for federal tax purposes , he faces a choice : he can either concede the invalidity of the transaction for which he had paid sizable fees — and pay taxes owed , interest , and penalties — or fight the IRS challenge , which would involve expensive , protracted litigation with an uncertain outcome , and the prospect of higher penalties . The majority of investor taxpayers opt to cut their losses , forgo the reported tax savings , and remit back taxes and interest . These concessions , however , do not prevent investor taxpayers from suing the professionals who peddled the invalidated tax-planning strategies . One such lawsuit is Logan v . Morgan , Lewis & Bockius LLP , 2022 Fla . App . LEXIS 7178 ( Fla . 2d DCA 2022 ).
In Logan , BDO , an accounting firm with a dedicated tax advisory group , and AIGI marketed an " investment strategy " directed toward high-income individuals . That strategy involved offsetting long and short options in the foreign currency markets . The only problem was that the executives in charge of BDO ' s " Tax Solutions " group (“ tax executives ”) knew that their strategy was likely illegal . But they believed that if they could obtain an opinion from a major law firm giving BDO a " clean bill of health " and downplaying the risk of illegality , they could quash the growing concern among others within BDO about potential criminal exposure . BDO could then also continue to market the strategy to new clients and encourage existing clients to claim the strategy ' s purported tax benefits . BDO ’ s tax executives had considerable incentive to keep the scheme going for as long as possible because they received thirty percent of the Tax Solutions group ' s significant profits .
To obtain that legal cover , the tax executives turned in part to Morgan Lewis . From the outset , the attorneys that they consulted at that firm recognized that the strategy was an illegal tax shelter .
Morgan Lewis noted that the " tax solutions " were " too good to be true ," " dubious ," and did not pass the "' smell ' test of experts ." One Morgan Lewis attorney promptly recognized several " uglies ," including " enormous losses and no apparent profit motive ." Morgan Lewis commented in an early meeting with the tax executives that " someone wanting to make a [ criminal ] case could ."
As if to remove all doubt , the IRS issued a warning that tax shelters involving " transactions calling for the simultaneous purchase and sale of offsetting options which were then transferred to a partnership " could give rise to criminal liability . Confirming its awareness of the illegality of BDO ' s tax shelter , Morgan Lewis internally concluded that the shelter was identical or substantially identical to the type identified in the IRS notice . A senior Morgan Lewis criminal tax expert presciently commented that " BDO ' s conduct reminds me of an old fashion [ ed ] Klein conspiracy "— a criminal tax conspiracy designed to obstruct the IRS ' s auditing of tax returns and collection of taxes .
But as notes of a conference between the tax executives and a principal Morgan Lewis tax attorney demonstrate , the tax executives wanted a whitewashed opinion with a preordained conclusion that was dismissive of any illegality or potential criminal liability : " List of all cr . statutes possible to apply + indication of no guilt ." And according to Logan ' s complaint , Morgan Lewis , despite its knowledge to the contrary , gave the tax executives exactly what they wanted .
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PBCBA BAR BULLETIN 15