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Lesson from Tax Court: Take Care When Representing Joint Filers

Posted on Sep. 25, 2017

We welcome back Professor Bryan Camp who has blogged with us on several prior occasions. Bryan and I worked together in Chief Counsel’s office in the General Litigation Division many years ago before he became a professor and everyone had the chance to learn what a great writer he is. He writes today about a case that first surfaced earlier this summer when a Tax Court order to show cause signaled trouble. I note that the case has a 2012 docket number and that it is not the only case involving petitioner husband on the Tax Court’s current and past docket. The age of the docket itself provides a cautionary tale for anyone picking up a case at calendar call.

The case involves the age old problem of representing a husband and wife where their interests do not align coupled with the practical problem of trying to reach a quick resolution at a calendar call. The lawyer involved, Frank Agostino, has served as the dean of the calendar call in Manhattan for many years. Frank’s tireless and significant efforts on behalf of low income taxpayers caused him to be recognized by the ABA Tax Section in 2012 with the Janet Spragen’s Pro Bono award. Here, he quickly devised a plan to resolve a long pending case but the Court, which no doubt also wanted to see the end of this long-standing case, raises concerns that must be raised in situations in which the positions of the parties do not align and one party ultimately refuses to sign a waiver. Note that after it issued the memorandum opinion, the Court issued a further order granting petitioner’s withdrawal of concession and discharging Frank, and his colleague, from the show cause order. Keith

Last week the Tax Court issued an opinion in Clark Gebman and Rebecca Gebman v. CIR, T.C. Memo 2017-184. It teaches a lesson about the pitfalls of representing a married couple and the very technical approach that a Court might use to apply conflict of interest rules to such representation.

The Gebmans had petitioned the Tax Court pro-se after receiving an NOD. One of the major issues was the taxability of distributions Mr. G. took from his IRAs.

At a January 30, 2017 calendar call in NYC they were still unrepresented. Now, the Tax Court, in conjunction with the ABA Tax Section, has implemented a calendar call program whereby attorneys show up at calendar call and volunteer their services to taxpayers. This is a most excellent program. Keith blogged about its history this past Spring and Judge Peter Panuthos also gives a great history of the program in 68 Tax Lawyer 439 (Spring 2015).

So up steps Frank Agostino at calendar call to help the Gebmans, pro bono. Trouble ensues. See below the fold for details.

Folks, we have all been there. Whether it is representing a closely held corporation, a family business, or joint filers, we have all been in situations where what is best for the group overall is not equally good for every individual in that group. When I was in practice we called this being a lawyer for “the situation” and it always, always, always raised conflict of interest flags that we needed to be sure were addressed.

In the Gebman’s case it appears that Frank concluded that Mr. Gebman simply had no non-frivolous argument to contest the NOD and that the best course of action for the couple would be to obtain spousal relief for Mrs. G. because Mr. G—who had been unemployed since 2007 (hence the apparent need to withdraw the IRA money)—was a turnip. It looks to me like Frank’s idea was to solve Mrs. G.’s problem at the liability stage (via spousal relief), thus shifting the payment burden to the Mr. G., The Turnip. Then Frank could solve Mr. G.’s collection problem in collection by showing Mr. G.’s turniptitude and obtaining a CNC or perhaps a DATC OIC.

Frank proceeded to implement this very reasonable strategy. At the January 30th calendar call, Mr. G. stands up and tells Judge Halpern “I’m going to do what’s best for my family, your Honor. And I’ve been counseled that I’ve made a mistake, and I need to be accountable to the Government.” At the same time Frank asked for leave to amend the Petition to put in an Innocent Spouse claim for Mrs. G.

Frank’s plan was a reasonable one. He was a being a great lawyer for the situation. But even the best plans fall prey to the winds of fortune. After the calendar call, recognizing that married couples always have an appearance of conflicting interests, Frank attempted to get both Mr. and Mrs. G to sign waivers and informed consent. Mr. G. refused. Moreover, Mr. G. “fired” Frank and eventually filed with the Tax Court two pro-se documents totally 50 pages of what the Court describes as containing “much rambling, extraneous matter…to show the injustice Mr. Gebman is claiming to be fighting.”   Still, the documents were enough to trigger the Court’s concern that Frank might be disabled from representing Mrs. G. without Mr. G.’s continued consent.

Sure enough, Judge Halpern decided that in order to obtain the liability relief sought under the spousal relief provisions of either §6015(b) or (f), Mrs. G. would have to take a position about the facts surrounding the IRA distributions that would be materially adverse to Mr. G.’s interest. Specifically she would need to show that either the IRA distributions were solely an income item attributable solely to Mr. G. and that she did not benefit from the distributions, or she would have to show that he fraudulently (as to her) converted the IRA proceeds to his own use.

Given this conflict of interests concerning the nature of the IRA distributions, Judge Halpern concluded that Frank could not continue to represent Mrs. G. without a waiver from Mr. G. After all, Frank went into the Calendar Call and met with both spouses, gave advice to both spouses, and thereby established an attorney-client relationship with both spouses. By doing so Frank was now in a position to be advocating adverse to his former client. Moreover, although not specifically mentioned by the Court, Frank potentially received from Mr. G. information that he could use against Mr. G. in advocating for Mrs. G.’s spousal relief. This all creates the potential to breach Frank’s duty to Mr. G. under Model Rule of Professional Conduct 1.9, unless Frank gets a waiver from Mr. G. But Mr. G. has refused to sign a waiver. So Mrs. G. will have to find a new attorney or else proceed on her own.

To me, the take-away lesson here is the Tax Court’s narrow approach to determining a materially adverse interest. It takes a very technical approach and looks only at the taxpayer’s theoretical interests in avoiding liability. But Mr. G. had no practical interest in avoiding liability and, further, has no non-frivolous argument for doing so. Mr. G. is a turnip. He has no assets. If you have nothing to lose you don’t fear the reaper. The Tax Court refuses to consider the practical aspect of this case. It says “Mr. Agostino does not address the fact that during the normal 10-year collection period…Mr. Gebman’s fortunes may change.” True enough in theory, but doubtful in reality.

Bottom line is that although you may come up with a reasonable strategy while acting as a lawyer for the situation, beware of the technical conflicts that may exist and deal with them appropriately.

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