PROBATE CORNER
DAVID M . GARTEN
Attorneys Liability To Third Parties For Sanctioning Listed Transactions ( Continued )
Now able to tell their other BDO partners and BDO ' s board that a major law firm had concluded that BDO had nothing to worry about , the tax executives not only successfully encouraged BDO to continue marketing and implementing the investment strategy , but they also had the cover they needed to continue to assure clients , such as Logan , that that strategy was perfectly legal and that they would ultimately be successful in any litigation with the IRS .
BDO ’ s client , Logan , through a passthrough entity , engaged in a series of these " investments ." When filing his tax return relating to the sale of his business , Logan , relying on BDO ' s assurances , filed his return claiming the supposed benefits of those investments , offsetting the purported losses against the substantial taxable gains from the sale of his business .
The IRS , however , eventually figured out what BDO was doing and commenced litigation against BDO in federal court . Ultimately , several of the tax executives pled guilty to criminal tax fraud in connection with the scheme .
The IRS also audited Logan . Relying on BDO ' s assurances that its investment strategy and his resulting tax benefits had been perfectly legitimate , Logan fought the IRS for several years . However , the IRS eventually obtained a $ 11 million tax judgment against Logan ' s partnership thereby disallowing the use of any purported losses from the " investments " against Logan ' s capital gains .
Logan brought suit against BDO , Morgan Lewis , and AIGI . In the complaint , Logan alleged , in part , that BDO breached its fiduciary duty to Logan by falsely advising and continuing to assure Logan that " claiming capital and ordinary losses " from the subject investments " was an appropriate tax treatment " despite knowing that its " investment strategy " was actually an illegal tax shelter . Logan further alleged that by providing the opinion , Morgan Lewis did not simply enable the underlying torts to occur but was instrumental to their success and directly contributed to Logan ' s ultimate damages . Without Morgan Lewis ' s " blessing ," the concerns of other BDO executives and BDO ' s board would have killed the tax executives ' program , and BDO never would have been able to continue to falsely assure Logan of the program ' s legitimacy and encourage Logan in his ongoing dispute with the IRS .
Morgan Lewis was sued for aiding and abetting fraud , aiding and abetting breach of fiduciary duty , and civil conspiracy . Morgan Lewis moved to dismiss the complaint , in part , for failure to state a cause of action arguing that it could not be liable to Logan because it had had no duty to him whatsoever and that it could not conspire as a matter of law with BDO , its own client , simply by providing legal services .
The trial court granted Morgan Lewis ' s motion to dismiss and the appellate court reversed . The court found that the trial court erred by dismissing Logan ’ s claim for aiding and abetting fraud and breach of fiduciary duty because the complaint alleged that Morgan Lewis did not merely remain silent or fail to act ; instead , it provided the tax executives with affirmative assistance in the form of a knowingly false and misleading opinion . In addition , the trial court erred by dismissing Logan ’ s claim for civil conspiracy because the complaint alleged that Morgan Lewis agreed to assist BDO in committing criminal tax fraud - conduct that plainly fell outside the scope of legitimate legal representation .
Practice Pointer : Your correspondence can come back to bite you ! If your client
voluntarily produces your correspondence , if you are sued for malpractice , or if the court finds that the crime / fraud exception applies [§ 90.502 ( 4 )( a )], then your correspondence with your client is discoverable . In addition , the identities of clients utilizing certain tax avoidance techniques are potentially not privileged . See United States v . Jenkens & Gilchrist , P . C ., 2004 U . S . Dist . LEXIS 6919 ( N . D . Ill . Apr . 21 , 2004 ), United States v . Sidley Austin Brown & Wood LLP , 2004 U . S . Dist . LEXIS 6452 ( N . D . Ill . Apr . 20 , 2004 ), and Doe v .
KPMG , L . L . P ., 2004 U . S . Dist . LEXIS 6191 ( N . D . Tex . Apr . 4 , 2004 ),
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PBCBA BAR BULLETIN 16