The article’s hook is the ironic failure of top lawyers to follow their own advice that they purportedly “always tell their clients” on how to commit fraud with impunity by ensuring that there is no paper (or electronic) trail of “incriminating” evidence of their crime.Ah, Bill, would that it were the case that lawyers recognize this fact. Unfortunately, this kind of thinking is all too common in the corporate world generally and the corporate bar specifically. And this is something that has been slowly eroding over a long period of time.
. . . .
What the Deal Book describes as corporate lawyers’ “cardinal rule” is clearly unethical and often a crime. A corporate lawyer who counsels a “client” on how to commit a crime without being prosecuted by using fraud mechanisms that prevent the FBI from finding the “incriminating” evidence establishing the crime has made himself a co-conspirator who is aiding and abetting the fraud.
* * * *
I am now approaching the 30th anniversary of graduating from law school and moving to Manhattan to practice law as a tax specialist several months later. Looking back on those years now everything kind of meshes together, but there are several incidents from my early years that vividly stand out.
One time I was working one-on-one with a lawyer for a savings bank that was lead negotiator on several deals we were working on at the time. I was a second-year associate, supervised by a senior partner that was my mother’s age, and I’m guessing the bank lawyer was about 15 years older than me. In the meeting he was grilling me about a deal structure – in what ways could we tinker with the deal that would boost the tax benefits that would arise from the structure. At one point, I told him I thought what he was proposing would “cross the line” and place at risk the benefits we were seeking.
“Suppose we did it anyway?” he asked. I was kind of flummoxed by this question.
“Well, aside from the taxes that would have to be paid and the interest, there would be penalties.”
“What kind of penalties?”
I knew there were penalties – just a few years earlier it was a big deal that Congress passed a bunch of new penalties for taking a position on your tax return when there was no legal basis for the position. But I had never really focused on penalties before.
“Honestly, I don’t know. I would have to look at it and get back to you.”
“Could you?”
Later that day I was reporting to the senior partner what happened at the meeting and told him of the client’s request. He looked kind of stunned, and immediately called the client. He asked me to pick up the other line to listen to the conversation (normally he would have put the call on speaker, but in this case he wanted to give the client the idea that they were speaking one-on-one). He asked the client whether he had requested to research penalties.
“Yeah,” he replied.
“Mark, we can’t do that.”
“I don’t understand.”
“Mark, our job is to advise you on how to do things legally. It’s not to advise you on how to do things illegally.”
Silence.
“If you want someone to give you that kind of advice, you’re going to have to find another lawyer.”
A few more seconds of silence.
“Understood,” Mark said.
* * * *
Of course, in later years that mentality began to change. After about 13 years at the law firm I was hired to work at one of the Big-5 (now Big-4) accounting firms doing international tax planning for major corporate clients. This was at the height of the “corporate tax shelter” craze, when the accounting firms had divisions in their tax practices whose job it was to dream up tax structures that they could sell to their clients. To me, as bad as it was at the law firm (I had spent many a late night struggling with clients who were constantly trying to “push the envelope”), it was kind of a shock to see such a large group of individuals dreaming up more and more arcane ways to game the tax system.
The firm I joined had a monthly meeting at which the “Tax Products Group” would present their ideas all of the tax practitioners in the New York region (there were thousands of such practitioners – they had to rent out one of the largest ballrooms in the city in order to seat them all). At each meeting they would pitch 4 or 5 ideas, the goal being that the practitioners, many of whom spent months at a time working at their clients’ offices, would bring the ideas to the attention of their clients in their day-to-day interactions. You could get a bonus if the client bought one of the ideas – a bigger bonus if you brought an idea to the group which they found to be “marketable.” Usually, the presentation would include a suggested fee if the client decided to implement one of the ideas, as well as a description of the amount of “comfort” that would be provided to the client. This last point was important: after all, you can’t really pitch an idea to a client if you’re unwilling to tell them the proposal “worked.”
But it was the definition of “worked” that really got to me. Tax practitioners tell clients an idea works by giving them an official firm opinion on the matter. There are various levels of comfort that can be expressed in such an opinion. Over time, the tax bar has worked out a range of comfort levels that can be provided:
- The idea “will” work.
- The idea “should” work.
- It is “more likely than not” that the idea works.
- There is “substantial authority” that the idea works.
1, 2 and 3 provide various levels of certainty, but in all three cases the advisor is telling the client that the law is on its side. In 4, the advisor is basically telling the client that the weight of the authority is against it, but there is enough out there that you won’t be penalized for taking the position. If you don’t have substantial authority, then you’re subject to a penalty ranging from 20% to 40% of the tax due, depending on the circumstances.
[If you commit tax fraud, the penalty is 75%, but then again, you’re not likely to get an opinion from practitioner on whether or not you’re committing tax fraud. As near as can tell, we haven’t slipped that low yet.]
In other words, if you have “substantial authority,” you can take the position you’ve successfully reduced your taxes and if you turn out to be wrong the most that can happen is that you have to pay the taxes (plus interest).
What was clear to me when I was attending these meetings was that an idea “worked” if you had substantial authority that it worked. In one way, this is not surprising. You haven’t really lost anything by being wrong: the worse that can happen is that you’ll be right back where you were if you hadn’t implemented the idea in the first place. But I was kind of appalled. When an advisor gives you a substantial authority opinion, he is basically saying you are breaking the law, but you may as well break it because there is no penalty for doing so.
And these were the kinds of ideas the accounting firms were marketing to their clients.
* * * *
I guess this isn’t quite as bad as what Black is complaining about, but it’s pretty close. In fact, I would argue that for the really big boys, who really face no punishment when they are found to be breaking the law, this is the state of the world we live in today.
If you make something illegal but there is no penalty for doing it, then it really isn’t illegal.
From an ethical viewpoint, there’s not really much difference between saying that, and saying that if something is illegal but you won’t get caught, it really isn’t illegal.
In fact, we're now at the point where some players are so big and so important that, even if they do get caught, they can have the law changed to retroactively legalize their conduct.
That is the mentality of Wall Street today. That's the mentality of multinational business.
I’ve been out of private practice for over 10 years. I worked in-house for a major multinational company for a number of years, and recently left the practice altogether. It's been a few years since I've dealt with people who are practicing at that level. God knows what ethical standards they are applying these days.
* * * *
In recent years, it’s been interesting to note that some judges, in cases involving tax avoidance transactions, have become more and more explicit in damning the role of the tax advisor in putting the whole thing together. In a case involving the infamous Long Term Capital Management, the court raked a number of highly prominent tax attorneys over the coals for their role in the tax avoidance scheme, including Bill McKee, the author of the leading treatise on partnership taxation.
This kind of “slut-shaming” is a welcome development in my view.
Imagine my dismay last year, then, when I came across a case where my old mentor was subject to that same sort of slut-shaming. I won’t link to the case, but I will say I was incredibly disappointed.
I'm not sure, though, that this will help much in the long run. What you really need is a government that's willing to get serious about enforcing the law. Right now we don't have that, and with Citizens United on the books, I despair that we ever will.
Ugh. Now I'm really depressed.....
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