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January 2008

Liability for Tax Opinions:

What’s an Opinion and
Who Can Sue?
By Robert W. Wood*

Rob Wood examines tax opinion liability and tackles the

tough questions: What’s an opinion and who can sue?

Opinions—Take Mine Please! any client for this payment.” Such letters or e-mails
are usually written to help one’s own client, not to
One segment of a tax advisor’s liability comes from help the addressee. Indeed, the author of the letter
opinions, and from other less formalized advice. may be quite adverse to the addressee.
Lawyers usually don’t need a reason to express their I believe there are a far greater number of such
opinion. Any venue will do just fine, thank you. communications than most of us realize. In fact, I
While an opinion letter provides that venue, it may believe there is greater risk of liability to clients and
also provide a road to perdition. third parties than there is liability for discipline or
As opinion liability is clearly a topic worth consid- penalties to the IRS. Although we live in an age of
ering, I suggest some ground rules about the persons increased IRS scrutiny, we also need to fear scrutiny
to whom one may be liable. Liability to a client for from clients, and even from non-clients, who receive
what one says in writing to the client seems unex- our opinions.
ceptional. More amorphous is the liability of lawyers From what sort of liability can a lawyer suffer by
who provide opinion letters (or something that looks rendering an opinion? Does the liability run equally
like an opinion letter) to a person other than a client. to all intended addressees? To unintended distribu-
Frequently, this may be done at a client’s direct re- tees? Perhaps most importantly, what can a lawyer
quest. Not all of these potential plaintiffs are clients. do to minimize this liability?
That expansion of classes of potential plaintiffs can Such questions must be tempered by concerns
be frightening. over how this fits into the lawyer’s ethical duties,
Furthermore, what do we mean by an “opinion”? and for non-lawyer tax professionals, to their similar
I use the term “opinion” here quite loosely. In some obligations. A lawyer’s primary duty is to his client.
cases, the letters I’ll examine are nothing more than Lawyer rules actually require a lawyer to cease-
representations written to another party, such as “Joe lessly advocate for his client. The Model Code of
is in good financial condition,” or “there are no liens Professional Responsibility admonishes lawyers to
pending against Joe.” In some cases, such letters may “represent a client zealously.”1 A professional who
be technical. An example would be a letter admon- worries about his own liability either to his client or
ishing that “you don’t need to issue a Form 1099 to to others may find that such worries interfere with
the client’s interests.
I must also add a word of clarification about the
Robert W. Wood practices law with Wood & Porter, in
San Francisco (www.woodporter.com), and is the author of
class of tax advisors I intend to cover. I recognize
TAXATION OF DAMAGE AWARDS AND SETTLEMENT PAYMENTS that tax advisors may increasingly be accountants,
(3d Ed. Tax Institute 2005 with 2006 Update) available at not lawyers. Furthermore, tax advisors, both lawyers
www.damageawards.org. and accountants, often view themselves as part of a


R.W. Wood 61
Liability for Tax Opinions: What’s an Opinion and Who Can Sue?

single profession. Circular 230 does much to rein- lawyer negligently misrepresented to him that the
force that notion. sale of his interest in a business could be tailored to
Yet, my focus here will be on lawyers, on potential avoid tax.
liability to clients and non-clients for malpractice, However, as a result of the sale, the plaintiff in-
misrepresentation, etc. Accountants probably face curred a significant tax liability. At trial, the jury found
the same or similar issues, but I stress that I have the tax lawyer 75 percent negligent (and the plaintiff
only analyzed the scope of legal malpractice li- 25 percent negligent). Thus, the plaintiff recovered the
ability, which technically may be different from the 75 percent of the taxes paid from his lawyer.
liability accountants may face.2 Although lawyers
and accountants may perhaps stand on equal footing Liability to Non-Clients
when it comes to claims for negligent or intentional
misrepresentation or fraud, I have not attempted to Liability to non-clients deserves special attention.
address an accountant’s liabilities as distinguished It’s hard enough to be loyal, honest and tireless with
from a lawyer’s. respect to one’s own clients without worrying about
Finally, I recognize that I am providing more of an potential duties to (and liabilities from) third parties.
introduction than a complete expose. I merely scratch Lawyers have strict conflict of interest rules which
the surface of the liability an attorney may face for control their actions, and it may seem hard to under-
writing tax opinions. There appear to be relatively take any duties to non-clients without risking some
few cases pertaining to third-party liability for tax diluting of these conflict standards.
opinions, except for tax shelter cases. Moreover, Given all these constraints, does a lawyer owe a
many of the tax cases involving third-party liability duty to a non-client? To what extent are non-clients
have been decided on procedural grounds, such as entitled to rely on opinion letters, whether written
the lapse of the statute of limitations, rather than expressly for them, indirectly to the public at large,
on the facts of the case. However, in many of those or not intended for them at all?
cases the courts have addressed whether plaintiffs We must begin with a bit of history. Historically,
have sufficient grounds to sue defendant law firms lawyers have not been held liable for their negligent
for writing tax opinions. misconduct in suits brought by non-clients. The
stated rationale for what may sometimes appear to be
Liabilities to Clients lawyer protectionism is the lack of privity of contract
between the lawyer and the non-client. That lack of
I would first like to dispense with cases that involve privity prevents those not in contract with the attor-
direct liability to clients, because they are reasonably ney from seeking damages in tort for the attorney’s
straightforward. If Tom Tax Lawyer writes an opinion conduct. Attorneys owe a duty of care only to their
letter to Cassandra Client expressing the view that a own clients.
tax deduction is more likely than not to be upheld, The privity of contract doctrine dates to the 19th
Tom may face direct liability to Cassandra if the century English case of Winterbottom v. Wright.4
deduction is denied. Whether liability will attach There, the Postmaster General contracted with the
should be controlled by such factors as the accuracy defendant to maintain mail coaches. The plaintiff,
with which the opinion describes the law and applies a postal employee who drove one of the coaches,
the facts to the law, the degree to which the opinion suffered injuries when one of the coaches broke
requires the client to contest the tax determination, down. The plaintiff sued the defendant for breach-
and the extent to which the lawyer has clearly set out ing its contract with the Postmaster General, arguing
what he is guaranteeing and what he is not. that the defendant’s failure to maintain the coach as
All of us should be capable of dealing with the required by contract caused the accident. The court
kinds of issues this presents. Sometimes the answers refused to allow a negligence action based on the
may be in shades of gray. For example, in Whitney duty contained in the contract, because that duty was
v. Buttrick,3 the plaintiff client brought a legal mal- owed solely to the Postmaster General.
practice action against his lawyer, claiming that the Several decades later, the U.S. Supreme Court in
lawyer was substantially negligent in structuring a Savings Bank v Ward5 expressly adopted the Eng-
sales transaction that resulted in a large income tax lish privity of contract doctrine. There, a bank lent
liability to the client. The plaintiff alleged that his money for the purchase of real estate in reliance on

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January 2008

a title report prepared by the defendant attorney. considerations should be first and foremost to clients,
The defendant certified title even though the land but non-clients cannot be safely ignored.
had previously been sold. Since the defendant was
not in privity of contract with the plaintiff, the court Opinion Letter
found no liability.
Over the course of the first half of the twentieth Liability Examples
century, the privity of contract doctrine reigned The four examples of opinion letter liability below
supreme. Courts and business people liked it; it are based on actual cases. In each example, I do not
was predictable and efficient. Over time, however, focus on the particular legal theory applied by the
courts chipped away at the privity doctrine.6 One of court, given the similarities and degrees of overlap
the seminal cases, Glanzer v. Shepard,7 involved a between each theory.
bean counter—yes, an actual bean counter, not an
accountant—though perhaps both are faced with Example 1: The Sucker Punch
similar issues regarding professional liability to non- Greycas runs a farm a few hours away from the town
clients. In this case, a bean seller employed a public where Larry, his lawyer and brother in-law, practices
weigher (a.k.a. bean counter) to certify the weight of law. Greycas is seeking a loan from a bank, and asks
the beans he sold. The buyer sued the public weigher Larry to write a letter to the bank upon which the
claiming negligence in being overcharged for beans. loan is conditioned. In other words, the bank will
The court found that the law imposed a duty of care not make the loan without this letter.
on the public weigher, despite the lack of privity Greycas tells Larry that there are no encumbrances
of contract with the buyer. The court considered or liens on his equipment. However, Greycas has
the “public” nature of the weigher, and noted that fallen on hard times, and has already pledged his
since the weigher provided a certificate directly to farm equipment to Savings & Loan. Regardless, Larry
the buyer, the bean counter was aware of the risk of provides Greycas with a letter stating that Larry has
misperformance.8 Other non-client liability theories conducted a U.C.C., tax and judgment search, and
include the following: that the equipment is free and clear of all liens and
Balancing of Factors9 encumbrances. In fact, Larry has made no effort to
Third-Party Beneficiary Theory verify Greycas’ statements. Furthermore, the bank is
Negligence Theory unaware of Larry’s relationship with Greycas.
Misrepresentation Theory Upon receiving the letter, the bank provides the loan
As the above discussion suggests, there are several to Greycas. Shortly thereafter, Greycas seeks bank-
legal theories that may give a non-client a cause of ruptcy protection, and the bank commences an action
action against an attorney rendering legal advice. against Larry to recover on the portion of the loan not
Most states have fashioned their own versions of yet satisfied. Of course, the bank was not in privity of
these rules, frequently intertwining various theories.10 contract with Larry.13 Nevertheless, it is hard to imagine
At least one state has even codified attorney liability that Larry would not be held liable for something based
to a non-client.11 Commentators have attempted to on his arguably intentional, certainly reckless, and at
establish a unifying theory, but courts have not yet the very least, corner-cutting behavior.
embraced such a concept.12 In Greycas,14 a case decided under Illinois law, the
To make matters more confusing, states often have court first pondered why the bank did not bring an
their own special rules for legal malpractice separate action for fraud or another intentional tort, specu-
and apart from misrepresentation or negligence. lating that perhaps an insurance recovery might be
Often, legal malpractice will be pleaded in the alter- predicated upon a lesser offense. Instead, Greycas
native to the theories described above. In contrast, involved a negligent misrepresentation action. The
some states, notably California, do not allow non- court pointed out the similarities between the Illinois
clients to bring suit for “legal malpractice” at all, law governing suits for negligent misrepresentation
although suits in other guises are permitted. and those for legal malpractice based on a false
Within this Byzantine maze, attorneys must find misrepresentation. In fact, the court said it had
their own way when issuing legal opinions—or letters “great difficulty in holding them apart.”15 The court
that might be taken as legal opinions, even though even noted that the defendant had also confused
they fall short of the traditional definition. The liability the two theories.


Liability for Tax Opinions: What’s an Opinion and Who Can Sue?

Notwithstanding confusion over the theories, the Illinois law, the court noted that an attorney’s duty
court brought swift justice. Although a lawyer has no owed to her client is paramount. Yet, a duty can arise to
general duty of care toward his client’s adversary, the a non-client in a particular transaction or relationship
court noted that this maxim is only the general rule. if the client intended that its primary or direct purpose
To provide a remedy for a non-client, the non-client was to benefit the non-client. This rule limits the scope
must prove that the primary purpose and intent of of duty owed by an attorney to non-clients.17
the attorney client relationship itself was to benefit The court found that the primary purpose of the
or influence a third party. relationship between the defendant and her client,
Here, the attorney wrote the letter for the sole pur- Stern, was to benefit Stern, not to benefit the plaintiff.
pose of attempting to influence the bank. The court However, upon issuing the opinion letter to influence
found that the attorney had a duty to use due care the plaintiff’s decision to enter the sale, the defen-
to see that the information was correct. The attorney dant assumed a duty of care towards the plaintiff
breached that duty by stating that he had performed with respect to the accuracy of the letter. The duty
a search when he had not done so. existed because the defendant’s actions (of issuing the
opinion letter for the benefit of the plaintiff) would
Example 2: The Close Call foreseeably affect the plaintiff.
Green, the owner of 100 percent of Triad Corporation, The real issue was the scope of that duty. Although
sold all of his shares to Stern for cash and a note. Lorri the plaintiff alleged that this scope included a duty to
is the lawyer representing Stern. Stern pledged the investigate Stern’s financial background to determine
newly purchased shares and all of Triad’s assets to his credit-worthiness, the court held that the defen-
secure the note. The purchase agreement, drafted by dant’s only duty of care was to the matters requested
Green’s attorney, required Lorri to deliver an opinion in the agreement and expressed in the opinion. The
letter at closing “in form and substance reasonably court suggested that to find that the duty went beyond
satisfactory” to Green. Lorri’s opinion letter affirmed the scope of what was required in the opinion letter
Stern’s authority to enter the agreement, recited the could conflict with the attorney’s duty of undivided
agreement’s due execution, and stated that Lorri has loyalty and confidentiality to her client.18
no reason to believe that any representation or war- The court thus recognized the inherent tension
ranty of her client was not true. between the attorney’s duty to the client and to oth-
Stern later defaulted on the notes and filed for bank- ers. The record did not indicate that the plaintiff (or
ruptcy. In fact, Stern had negotiated for a line of credit Stern for that matter) had requested the defendant to
with Allegheny Credit Corp. to finance the purchase, investigate Stern’s background. Likewise, the opinion
and had granted Allegheny a first security interest letter did not opine on Stern’s credit-worthiness. The
prior to granting the security interest to Green. court concluded that the defendant did not have a
Green brings suit against Lorri, alleging that she duty to investigate.
had a duty to exercise a reasonable degree of care Since it was the defendant’s client which asked
and skill in her investigation of the matters contained for the opinion letter in this case, there was a lesser
within her letter, and in making the assertions and concern with the possibility that an acknowledgment
representations contained therein. Green alleges that of a duty of care to the plaintiff would engender a
Lorri was negligent in failing to perform a proper in- conflict with the interests of the client.19 If a non-client
vestigation of her client’s credit, legal and financial had asked for an opinion letter, a strong argument
history. If she had, she would have known that the might exist for a duty of care to the non-client, thus
representations in her opinion letter were untrue or creating a conflict.20
misleading. Green does not allege that the opinion This case shows that attorneys may be able to
letter contained any negligent misrepresentation, limit the scope of the duty owed to non-clients. At-
nor that Stern made any misrepresentation. Interest- torneys can speculate why the purchase agreement
ingly, the purchase agreement, which contained the was not included in the complaint (e.g., perhaps
representations and warranties, was not included in the agreement was silent regarding the credit-
the complaint.16 worthiness of the buyer). Even so, attorneys need
The court reviewed the nature of the duty owed by to be careful, not only in what their own opinion
an attorney to a non-client, and how it interacts with letters say, but also in any references their opinions
the duty owed to her client. Deciding the case under make to other agreements.

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January 2008

Example 3: The Investment Shuffle terminative factor for the plaintiff to make the loan.26
Red is thinking about loaning money to the Burbank The court noted:
general partnership. Al Attorney represents Booker, a
partner in the Burbank general partnership. Booker Half the truth is often as misleading as outright
retains Al to write an opinion to facilitate the deal. falsehood. Where a defendant makes false state-
Al writes an opinion letter for Booker, knowing that ments, honestly believing them to be true, but
Booker will show the letter to Red, and that the letter without reasonable grounds for such belief, he
will be used to induce Red to make a loan to Burbank. may be liable for negligent misrepresentation.27
Indeed, the opinion letter itself provides that it will be
shown to Red to induce him to make the loan. Thus, the court acknowledged that an omission of
The opinion letter provides that Burbank is a gen- a material fact from an opinion letter could create
eral partnership, consisting of 14 individual general attorney liability.
partners. In fact, Al knows that there is an issue as
to the legal nature of Burbank, as he is aware that Example 4: Slip of the Tongue
the general partnership may have been recently dis- B.L.M., a partnership formed to develop land, ap-
solved. Al also knows that the 14 individual owners proached the city of Rialto in hopes of constructing
do not agree as to Burbank’s legal entity type, and that a building. The draft agreement prepared by B.L.M.’s
some owners genuinely believe that their liability to counsel called for Rialto to issue public financing
Burbank is limited. However, Al fails to include this to construct the project, and consequently would
information in his opinion letter. require public bidding and the payment of the pre-
Red loans money to Burbank in reliance on Al’s let- vailing wage. Since this would have made the project
ter, and the loan goes bad. Plaintiffs allege that Al had economically unfeasible to B.L.M., B.L.M. suggested
a duty to disclose not only the legal status of Burbank, certain material changes to the project.
but also information regarding doubt as to that legal B.L.M proposed to construct the building itself,
nature and the beliefs of its members. In other words, and for Rialto to later purchase it. Rialto accepted
plaintiffs allege that the failure to disclose such infor- B.L.M.’s proposal. Rialto appointed a financial advi-
mation made the opinion letter misleading.21 sor and a legal advisor, Sabo & Deitsch (“Sabo”) to
In a case decided under California law, the court represent it.
allowed a negligent representation cause of action. B.L.M.’s complaint alleges that Sabo told him that
Although the court pointed to the California Civil public bidding and payment of the prevailing wage
Code to determine the elements of the cause of ac- were not required on a project financed in this new
tion, it looked to the multi-factor test to determine manner. When B.L.M. later learned that the payment
whether a duty existed.22 The court noted that the of the prevailing wage was in fact required, it stopped
defendant undertook to assist in securing the loan work on the project and brought suit against Sabo.
on behalf of his client.23 Indeed, the opinion letter The complaint only alleges that Sabo gave a false
was rendered for the purpose of influencing plaintiff’s oral opinion.28
conduct, and the result was “clearly foreseeable.”24 In a case brought under California law, the plaintiff
Thus, the court had no difficulty in finding that brought several causes of action again the law firm,
the “issuance of a legal opinion intended to secure Sabo. The first cause of action was professional mal-
a benefit for the client must be issued with due practice, the elements of which, under California
care, or attorneys who do not act carefully will have law, are similar to pure negligence. The court held
breached a duty owed to those they attempted or that B.L.M. could not recover on this cause of action
expected to influence on behalf of their clients.”25 due to Bily v. Arthur Young & Co.,29 which held that
The crux of the decision was whether the defendant under California law, non-clients may not recover on
breached his duty of care by omitting certain infor- a pure negligence theory.
mation from the opinion letter. The opinion letter Furthermore, the court held that B.L.M. could also
stated that Burbank was a general partnership, when not recover under a third-party beneficiary theory,
several facts known to the attorney may have cast since Sabo’s opinion was not intended to benefit
doubt upon that characterization. B.L.M. B.L.M. claimed it was a third-party beneficiary
The court held that the lawyer had a duty to since it was mentioned in a resolution passed by the
disclose this doubt, since it might have been a de- Rialto city council which appointed the defendant


Liability for Tax Opinions: What’s an Opinion and Who Can Sue?

as legal counsel. The court held, however, that this different standards where there are different degrees
alone was not sufficient to render B.L.M. a third-party of adversity makes sense, though this may be difficult
beneficiary. Instead, a third party beneficiary must to administer.
show that it was the intention of the client, the party
in privity, to create a duty, and that the “imposition of Tax Opinion Letters
the duty carries out the prime purpose of the contract
for services.”30 All of this talk of liability and reliance to third parties
More interesting was B.L.M.’s negligent misrepre- brings us (finally) to tax. Tax opinion letters arguably
sentation claim. Under this cause of action, B.L.M. come in two primary flavors. In one, a promoter
needed to show that the defendant intended to influ- incorporates a tax opinion letter into a prospectus,
ence B.L.M., and that B.L.M. justifiably relied upon which is disseminated to potential investors. Non-
the communication. The court noted that the intent clients use this offering material to decide whether to
element created an “objective standard” under which invest in the particular transaction. Examples include
the specific circumstances had to be examined to sales of securities (stocks or bonds) and real estate. I
determine whether the defendant had “undertaken don’t find this first category of letter terribly frighten-
to inform and guide the third party with respect to ing, perhaps because issues of liability to third parties
an identified transaction or type of transaction.” The are predictable (if not downright expected) with this
court concluded that B.L.M. was unable to establish first category of communication.
that the defendant intended to influence B.L.M. in The second category is a residual catch-all basket
its discussions, since the plaintiff did not allege this that includes all other opinion letters not included
in its complaint. in the first. Again, I use a fairly loose definition of
Even if B.L.M. would have been able to prove “opinion” here, since many of these letters may look
the element of intent, it still would not have been nothing like a formal opinion letter. Examples might
successful, since it was not able to show justifiable include the following:
reliance. B.L.M. alleged that it relied upon the oral A letter opining (or advocating) whether a de-
opinion of opposing counsel that the payment of the fendant should issue a Form 1099 to a plaintiff
prevailing wage was not required. However, B.L.M. resulting from a lawsuit settlement, or whether a
was represented by its own counsel, and its counsel plaintiff should include his contingent attorneys’
had, at least once before, provided a legal opinion fees in income
directly contrary to the advice B.L.M. was claiming Corporate counsel’s letter to non-client share-
to have relied upon. holders regarding the likely tax effects of a
Plus, an attorney’s duty is to protect his client in corporate distribution
every possible way. It would be a breach of this Counsel for a domestic trust’s letter to a foreign
duty for an attorney to assume a position adverse non-client beneficiary of the trust regarding the
or antagonistic to his client. (There’s the old tension U.S. income tax effects of a distribution
again.) The court noted that it would be anomalous Corporate counsel’s letter to employee plan partic-
to allow a person who has an interest adverse to an ipants regarding the effects of a stock option plan,
attorney’s client to rely on the legal opinion of the the availability of a Code Sec. 83(b) election
attorney without some sort of justification. There is understandable liability to clients to whom
Although this lawyer avoided liability, the dissent- one writes such opinions. That liability will depend
ing opinion made an ominous comment: these parties on whether the letter is accurate, and precisely what
may not have been adverse parties. Indeed, the two it guarantees. For example, in Wright v. Compton,
came together to construct a building, and one party Prewett, Thomas & Hickey,31 a law firm represented
was even a governmental entity. The majority opinion to a client that a spin-off should by tax-free. Later,
rebutted this contention, noting that since the parties the corporation and its shareholders collectively filed
were negotiating at arm’s length, they were in fact a malpractice action against the law firm and an at-
adverse parties. torney of the firm after they had to pay tax. The tax
Consequently, the defendant owed a duty of loyalty attorney prepared a letter to the corporation stating
to the city. The court found that the plaintiff did not that it could reorganize its business tax-free pursuant
have sufficient justification to rely on the defendant’s to Code Sec. 355.32 The attorney also prepared various
opinion. Still, the dissent’s suggestion that there are documents to effectuate the reorganization.

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January 2008

Later, when the IRS audited the corporation, it de- securities in worthless coal rights as tax shelters, while
termined that the plaintiffs were required to pay tax concealing that they would take the lion’s share of
and interest.33 The IRS ruled that the reorganization the proceeds. Defendant Wasserstrom wrote a tax
did not qualify as a tax-free reorganization and was opinion which was included in the offering memo-
taxable.34 Although the trial court granted summary randa distributed to the plaintiffs.
judgment to the defendant based on the lapse of the The tax opinion said that the IRS would allow the
statute of limitations, the Arkansas Supreme Court deduction of large advanced royalty payments by
reversed and remanded the case for trial, as there was non-recourse notes. Plaintiffs alleged that the tax
a genuine issue of fact related to the timing of the opinion contained fraudulent financial projections,
reorganization.35 The case stands for the proposition and that no reasonable basis existed for this position.
that a lawyer who provides negligent tax advice may Rule 10b-5 of the 1934 Securities and Exchange Act
be liable to his client, and perhaps to others. prohibits misrepresentations and misleading omis-
Yet, the potential liability to third parties is not so sions in connection with the sale of securities, and
obvious. This second category of communications fraudulent financial projections are actionable under
encompasses a huge universe of correspondence, and this rule. When an attorney who has greater access
for that reason, the liability possibilities to non-clients to information or a special relationship to investors
are troubling. Although some of the examples noted makes a representation in an opinion letter, the at-
above may appear to involve a type of derivative li- torney has an obligation to disclose data indicating
ability or duty (for example, where corporate counsel that the opinion or forecast may be doubtful. Indeed,
makes statements to shareholders or employees about the court in Eisenberg noted that:
the tax effects of a distribution or a stock option plan),
many do not. [W]hen the opinion or forecast is based on un-
derlying materials which on their face or under
Type 1 Opinion Letters: the circumstances suggest that they cannot be
relied on without further inquiry, then the failure
Tax Shelters to investigate may support an inference that when
Cases generated by the first type of tax opinion letter [the defendant] expressed the opinion it had no
often consist of the following generic fact pattern. A genuine belief that it had the information on
taxpayer reviews an investment prospectus which which it could predicate that opinion.38
contains an attorney’s tax opinion letter. The tax-
payer may or may not have an independent attorney At trial, the jury found for the defendants on the
review the prospectus. The taxpayer invests in the 10b-5 claim. On appeal, plaintiffs challenged the
transaction, which typically generates a loss. The jury instructions because the trial court refused to
loss is deducted on the taxpayer’s return, but the IRS instruct the jury regarding projections and forecasts.
subsequently disallows the deduction. Since plaintiffs presented sufficient evidence, the
The taxpayer then becomes a plaintiff, suing the court vacated the judgment. At the new trial, the
attorney who wrote the tax opinion. The taxpayer court noted that the jury must determine whether
frequently also sues the promoter and others in- the circumstances generated a duty for the defendant
volved in the transaction. This situation often invokes to investigate.
securities law. When invoked, attorney liability may Plaintiff also brought a state law negligent misrep-
not be predicated merely upon state tort law. Many resentation claim. Under Pennsylvania law, which is
aspects of the liability attaching under federal securi- based on the Restatement of Torts Section 522, the
ties law appear to parallel the elements and rationale plaintiff had to prove justifiable reliance. Although
of state tort law.36 the jury found for the plaintiff, the court found in fa-
vor of defendants (granting j.n.o.v.), noting that there
The Eisenberg Case was insufficient evidence to support the plaintiff’s
The case of Eisenberg v. Gagnon37 well illustrates the reliance. The appellate court reversed, reinstating
tax shelter fact pattern. Martin Eisenberg and Arthur the jury verdict.
Nissen purchased interests in a limited partnership The appeals court found the plaintiff’s reliance to be
whose only asset was land containing coal. They justified despite some sketchy facts. Indeed, Plaintiff
argued that defendants orchestrated a scheme to sell Nissen testified that he “spent an hour or two” reading


Liability for Tax Opinions: What’s an Opinion and Who Can Sue?

the offering documentation and invested in reliance that the Stein firm also helped author the LPII pri-
of those documents. Plaintiff Eisenberg testified that vate placement memorandum. The memorandum
he had read half of the offering memoranda and included a disclaimer, stating that prospective
skimmed the other half. According to the court, this investors should only rely upon representations
was sufficient evidence to present the question to contained in the LPII documents.
the jury. “Plaintiffs need not prove that they read the As it turned out, the IRS disallowed various deduc-
materials in their entirety, or that the recommenda- tions and losses Turtur had claimed on the basis of his
tion of an agent or advisor did not play a part in their investment in LPII. Turtur filed a complaint alleging
investment decision.”39 common law fraud, violation of the Texas Securities
The Eisenberg court thus sets quite a low bar for Act, and violation of the Texas Consumer Protection
what is considered justifiable reliance. Indeed, the Act. Turtur named a large number of defendants,
court noted that one can justifiably rely without even including Rothschild, the Stein firm, LPII and other
reading the entire document, or by just spending an defendants. Over time, all of the claims against all
“hour or two” with the materials. Perhaps this suggests of the defendants except for the Stein law firm were
that tax opinions should be full of disclaimers and easy dismissed from the action. Once the Stein firm was
to read language rather than technical jargon. left as the sole defendant, the court transferred the
Emulating Eisenberg, the court in Turtur v. Roth- common law fraud claim to the United States District
schild Registry International40 held that it is not Court for the Southern District of New York.41
enough for a plaintiff taxpayer to rely on offering In August 1993, the fraud claim was dismissed on
documents without actually reading the tax opinion. summary judgment. The district court found that Tur-
The court affirmed the district court’s grant of sum- tur failed to establish (as required by New York law
mary judgment for the defendant law firm because in a claim for common law fraud) Turtur’s “actual,
there was no evidence that the plaintiff taxpayer re- direct reliance upon the alleged misrepresentations”
lied on the opinion in making his decision to invest made in connection with LPII.42 The fatal flaw in Tur-
in a transaction. tur’s claim, according to the district court, was that
Turtur, the plaintiff taxpayer, learned of tax-ad- Turtur never actually saw, much less relied on, the
vantaged limited partnerships that leased computer supposed misrepresentations that appeared in the
equipment. Rothschild Registry International (“Roth- LPII offering materials.
schild”) was the architect behind the limited On appeal, Turtur contended that a claim for fraud
partnerships. Turtur learned that the IRS had ques- may lie even when a plaintiff does not directly rely
tioned various Rothschild equipment leasing limited on a fraudulent representation made by the defen-
partnerships, and in some cases, disallowed related dant, if (1) the plaintiff received the information from
tax deductions. Even with such knowledge, Turtur someone who had received it from the Stein firm,
received and reviewed a private placement memo- and (2) the Stein firm intended the misrepresenta-
randum and tax opinion related to the various limited tions to be conveyed to him.43 The court found that
partnership units (“LPI”). The tax opinion was pre- the Rothschild representative who stated that the LPII
pared by the New Jersey law firm of Stein, Bliablias, documents were the same as the LPI documents was
McGuire, Pantages & Gigl (the “Stein firm”). acting for Rothschild, not for the Stein firm. And,
When Turtur sought to invest in LPI, a representative while Stein (being the drafter) was presumed to have
at Rothschild stated that LPI was fully subscribed, but known of the documents’ similarity, the court stated
that another partnership, LPII, would soon be avail- that the plaintiffs provided no evidence that the
able. Turtur relied on representations from Rothschild Stein firm ever authorized, encouraged or expected
that the substance of the offering documents and tax anyone to tell investors that they could rely on the
opinion in LPII would be identical to those presented private placement memorandum and tax opinion
in LPI. Based upon those representations, Turtur from one venture as a sufficient basis for investing in
invested in LPII before reading or receiving the LPII another venture to which the earlier documents did
private placement memorandum. not expressly refer.
The offering documents and the tax opinion Moreover, in granting the motion for summary
in respect to LPII were identical to the offering judgment, the court stated that Turtur failed to
documents and tax opinion in LPI. The Stein firm show that the memorandum and the tax opin-
prepared the tax opinion for LPII, and Turtur claimed ion even existed at the time Turtur spoke to the

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January 2008

Rothschild representative about LPII. In affirming tive misrepresentations and material omissions.
the district court’s grant of summary judgment The misrepresentations concerned the operations
based upon a lack of reliance, the court stated of the trading program (i.e.. delivery of securities,
that the Stein firm’s position was strengthened price movements, and margin deposits), and state-
by the disclaimer found in the LPII private place- ments that the program could support a reasonable
ment memorandum. 44 The court found that the expectation of gain (actually, it was designed to
disclaimer refuted any inference that the Stein obtain tax losses).
firm intended or should have expected Rothschild Arvey (the law firm) moved for summary judgment
representatives or others to utilize the legal papers on the misrepresentation claim, arguing that it could
drafted for one partnership as the basis for an in- not be liable for an opinion which was explicitly
vestor to enter into another. based on an assumed set of facts represented to it
While the Eisenberg court45 found that a plaintiff by its client. It also argued that it had not conducted
who spends a couple of hours reading through any independent investigation into whether the facts
documents can justifiably rely on such docu- from its client were accurate. The court did not
ments, the court in Turtur found that a plaintiff concur, noting that an opinion is deemed untrue for
must actually see and read the documents federal securities law purposes if “it is issued without
pertaining to a particular investment strategy to reasonable genuine belief or it has no basis.”48
bring an action against an individual who issues Arvey argued that the opinion letter contained dis-
an opinion.46 claimers, and that it was based solely on facts provided
by the client.49 The court, however, noted that:
The Kline Case
First Western Government Securities (“First when a law firm knows or has good reason to
Western”) engaged in sophisticated financial know that the factual description of a transaction
transactions. Ernest Kline purchased various for- provided by another is materially different from the
ward contracts packaged by First Western.47 Arvey, actual transaction, it cannot escape liability simply
Hodes, Costello & Burman (“Arvey”) issued three by including in an opinion letter a statement that
opinion letters over a two year period concerning its opinion is based on provided facts.50
the tax consequences of these investments. All three
opinion letters written by Arvey were addressed Arvey next argued that plaintiff’s reliance on the
to First Western. According to the court, certain opinion letter was unreasonable. The court articulated
themes were present in each letter: a variety of factors to determine the reasonableness
Each was intended for First Western’s personal of plaintiff’s reliance, including: (1) the existence of
use only and was not intended to be, and should a fiduciary relationship; (2) plaintiff’s opportunity to
not be, relied upon by persons other than First detect fraud; (3) the sophistication of the plaintiffs;
Western. (4) the existence of a long-standing business or
Each was based on facts as described by First personal relationship; and (5) access to the relevant
Western. The results provided within the letter information.51 While Arvey argued that plaintiffs
may be changed by facts unique to individual were sophisticated investors, they were not so so-
customer’s accounts. phisticated that they should have recognized that
The transaction’s validity hinged on whether it the descriptions of the transactions in the “opinion
was entered into with a reasonable expectation letters bore little relation to reality.” Indeed, the court
of generating a profit. noted that:
Despite each letter’s statement that it was for the
exclusive use of First Western, Arvey was aware that [a] potential First Western investor, armed with
First Western was providing the opinion to potential Arvey opinion letters and the information about
investors. In fact, one investor’s counsel went so far as his own account that Arvey stressed might be
to write a letter to Arvey noting that First Western had important, could have obtained a tax opinion
provided the tax opinion letter with its brochures. from his attorney that would have been wrong
Kline sued under Section 10(b) of the 1934 Securi- simply because of the misleading way in which
ties and Exchange Act, alleging that he relied upon the program allegedly was described in the
these letters, and that they contained both affirma- opinion letter.52


Liability for Tax Opinions: What’s an Opinion and Who Can Sue?

Mere reliance on Arvey’s legal conclusions, without Regarding the omissions claim, the plaintiff alleged
more, would have been unreasonable. Yet, it may that the tax opinion was misleading. After all, Arvey
have been reasonable for plaintiffs to rely on the failed to include in its opinion letter information that,
factual descriptions of the trading program. Balancing if included, would have undermined its conclusions.
all of the factors, the court found plaintiff’s reliance Finding for the plaintiff, the court found a limited duty
to be reasonable. to investigate and disclose, when, by the drafter’s omis-
A vigorous dissent argued that the reliance was not sion, a public opinion could mislead third parties.
reasonable since the letters: Interestingly, the court considered this opinion pub-
were addressed to someone besides the taxpayer; lic, even though it was addressed to First Western. Even
were, by their terms, only intended for use by more notably, by its own language, it was not to be
someone else; shown to anyone else, yet it was disseminated to third
by their terms could not be shown to the investor; parties. In fact, the court specified that when a profes-
were predicated on facts not supplied by the sional undertakes an affirmative act to communicate,
author of the letter; there is a general duty to speak truthfully. This includes
warned that the IRS likely would challenge the a duty not to omit (sometimes referred to as a duty to
claim for favorable treatment, as it had in similar disclose) qualifying information, the absence of which
situations; would render the communication misleading.
explained the basis for challenge; There is one more teaching from Kline. Arvey moved
stated that the courts might take a strong stance for summary judgment, arguing that it could not be
contrary to the opinion; and liable for its tax opinion because it relied upon the set
flatly announced that it was “impossible” for the of facts represented by the client.54 Moreover, Arvey
author of the letter “to express an opinion as to argued that it failed to conduct an independent in-
the deductibility of any particular loss incurred vestigation into whether the facts from its client were
by” an investor. accurate, and thus could not be liable for its tax opinion.
Unfortunately for Arvey, the majority of the court The parties in Kline argued before the court on January
was not persuaded by this litany of points. 25, 1993 and the court filed their decision on May 2,
1994. However, had the new rules of Circular 230 been
Historical Explanation? in effect at that time, Arvey’s arguments would provide
Arvey’s disclaimers were not sufficient to prevent little help in attempting to avoid liability.
liability. However, it seems likely that some of the Arvey’s tax opinion, undoubtedly a “covered
court’s reasoning lies in the considerable history opinion,”55 was relied upon as the basis for the plain-
between Arvey and Samuels, the founder of First tiff’s tax position. As a covered opinion, Arvey would
Western. Sidney Samuels founded First Western be required to perform reasonable due diligence of
in 1978. Prior to that, he was a general partner in all the relevant facts to arrive at a legal conclusion.
Price & Company (“Price”). The Plaintiff alleged that In fact, under the ambit of Circular 230, Arvey would
First Western’s trading program were substantially be required to: use reasonable efforts to identify and
similar to Price, and indeed modeled on it. Arvey ascertain all relevant facts; base the opinion on rea-
assisted in Price’s formation, its offering material, sonable factual assumptions; rely only on reasonable
and represented it in connection with IRS civil and factual representations, statements or findings of the
criminal investigations. taxpayer; relate applicable law to the relevant facts;
The Plaintiff alleged that Arvey made no refer- base the opinion on reasonable legal assumptions,
ence to prior IRS investigations of Price or Samuel’s representations or conclusions; contain internally
connection to Price. Interestingly, an IRS investiga- consistent legal analyses or conclusions; consider
tion ultimately led to a finding that Price’s trading all significant federal tax issues (unless limited in
programs were sham transactions.53 Furthermore, scope); provide a conclusion as to the likelihood that
the IRS, the SEC, and the Minnesota Department the taxpayer will prevail on the merits with respect to
of Commence had begun investigations of First each significant Federal tax issue considered in the
Western and its customers by the time Arvey is- opinion; and provide an overall conclusion as to the
sued its final opinion letter. The final opinion likelihood that the Federal tax treatment of the trans-
letter, however, only mentioned the audit of First action or matter that is subject of the opinion is proper
Western’s customers. treatment and the reasons for that conclusion.56

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January 2008

Had the new Circular 230 rules been in effect at Updating Liability?
the time, even the vigorous dissent in Kline might What happens where future events intervene and
have found that the plaintiffs justifiably relied upon may influence (or even contradict) the advice in a
Arvey’s opinion. tax opinion? Tax opinion letters generally expressly
negate the duty of the author to update the letter for
Type 2 Letters: future events. Particularly where there is an express
statement of this sort, common sense should pre-
Miscellaneous Correspondence clude finding liability for an alleged failure to update
The above cases illustrate attorney liability arising that opinion letter. Interestingly, perhaps in an effort
from an opinion (or perhaps a communication less to be helpful, an attorney may affirmatively offer to
than an opinion) provided to a non-client. This begs update an opinion letter (which by its language is
the question of what exactly constitutes an opin- not to be updated). Here, a failure to act may clearly
ion. While we usually think of an opinion as being create liability.
written, even a verbal opinion may be actionable.57 For example, in Lama Holdings,58 the plaintiffs were
Although there do not appear to be many authorities foreign investors who hired Shearman & Sterling to
of this type, the fact patterns where these issues can facilitate an investment in Smith Barney. Included
arise are legion. in this facilitation was tax advice for dividends and
For example, take the situation where Lenny for a potential later sale of the stock. (For those of us
Lawyer represents a victorious client during the old enough to remember pre-1986 tax law, this was
settlement of litigation. For Lenny’s representation, essentially a General Utilities strategy!)
the court has ordered attorney fees paid directly to The Plaintiffs alleged that in August or September
Lenny as the attorney. The opposing party is prepar- of 1986, they made a specific inquiry to Shearman
ing to present an award of $100 to Lenny’s client, & Sterling regarding the possible effects of a tax bill
plus $80 of attorney fees to Lenny. The defendant pending in Congress. They alleged that a Shearman &
asks Lenny and his client how he would like to Sterling partner replied that “there were no significant
receive the payments. tax changes enacted as of that time, but that the firm
Lenny drafts a letter to the defense counsel (copy- would inform plaintiffs if any significant amendments
ing the defendant), explaining that the defendant to the U.S. tax laws were enacted.”59
should cut separate checks, and issue separate Forms After the enactment of the 1986 tax legislation,
1099. Lenny does so at his client’s request and for plaintiffs sold their stock without consulting Shear-
his benefit. Is Lenny’s letter an opinion, and can the man & Sterling, and suffered a $33 million tax.
non-client bring an action on it? Plaintiffs brought suit, and Sherman & Sterling moved
Although I find no authority directly on point, I to dismiss, claiming that the facts were insufficient
suppose this letter could be considered an opinion. to state a claim. The court disagreed, noting that
Regardless of whether it is labeled as an opinion, it “[i]n attorney-client agreements there may be li-
would appear that a letter of this sort could be action- ability when there is a promise to perform and no
able under several legal theories. Tax practitioners subsequent performance, or when the attorney has
should be mindful of these risks when providing any explicitly undertaken to discharge a specific task and
sort of communications to non-clients. then failed to do so.”60 Ultimately, it appears that the
Let’s take another example. Lucy Lawyer’s cli- parties settled, so we may never know how a jury
ent asks her to write a letter to a bank in order to would have decided the case.
persuade the bank to make a loan to her client.
The letter may discuss Lucy’s relationship with her Back to Shelters
client, or it may discuss the client’s financial mat- It is hard to discuss even this second catch-all type
ters, known or unknown to the bank. The details of communication to non-clients without again
recited in the letter aside, the question is whether reverting to tax shelters. Tax shelter letters may fall
this could be considered an opinion letter, and into the offering circular discussion above (that I
whether it could create liability for the attorney. The label as Type 1 liability), but they may also fall into
nomenclature of the letter is debatable, but it is not my second or catch-all category. A typical shelter
hard to imagine the letter meeting the requirements invites investors to invest by providing a prospectus
of a negligent misrepresentation. that contains a tax opinion (or memo) written by


Liability for Tax Opinions: What’s an Opinion and Who Can Sue?

an attorney. What happens when a sophisticated could revolve around attorney-client privilege. If the
businessman receives the prospectus, and then has communications between the non-client and his at-
his own personal attorney review it? torney are privileged, a court might have difficulty
In Kline,61 the court believed that the tax opinion in determining the precise nature of the non-client’s
was so misleading that an attorney—let alone a tax reliance upon it. However, perhaps the plaintiff’s
attorney—may not have understood what was oc- act of placing this advice in controversy, a subject
curring. Let’s suppose a particular tax opinion is not going to the very heart of the matter, would waive
misleading, but is exceedingly complicated, per- the privilege.
haps incomprehensible even to some tax attorneys. Another variation in fact patterns would be pres-
I suspect that is not uncommon. Go a step further ent if the non-client did not retain counsel. On its
and suppose that whether the transaction works to face, the non-client’s failure to have counsel may
achieve its desired tax treatment is somewhat doubt- increase support for finding the plaintiff justified in
ful, but the degree in doubt is disclosed. his reliance. With no counsel of his own on which
Suppose the non-client’s attorney reviews the pro- to rely, the plaintiff may argue that the opinion
spectus including the tax opinion, and provides his provides support for his reliance. Conversely, an
blessing. Based on this review and advice, the non- argument could be made that anyone would be fool-
client decides to invest. A few years down the road, ish to enter into a sophisticated transaction without
the IRS disallows the deductions. counsel. Although the lack of one’s own counsel
Can the non-client claim to have relied upon the tax may strengthen a finding of justifiable reliance, it
opinion letter in the prospectus, even though his own may simultaneously strengthen the argument that
counsel has reviewed the transaction and blessed it? the reliance was not justified.
It seems arguable that the non-client has relied upon It may matter in this analysis whether the opinion
the advice of his own attorney. The answer may be states expressly that “you should get your own tax
affected if the non-client’s attorney contacted the au- advice.” Although such a disclaimer seems coun-
thor of the tax opinion to obtain clarification. Perhaps terintuitive in an opinion that accompanies an
that would import additional liability. offering document, opinions sometimes weave in
The Kline court suggests that the plaintiff may justifi- such advice, particularly as to certain issues. Such
ably rely on the third party opinion even though his a disclaimer should reduce the appropriateness of
own attorney reviewed the transaction. Yet, compel- reliance in at least some cases.
ling arguments can be made for the opposite position,
as voiced by the dissent in Kline. The courts would Conclusions
probably consider the appropriateness of reliance on
particular facts to be highly factual. Underscoring Attorney liability to clients is not terribly hard to un-
all of this should be the principle that the author of derstand and is fairly straightforward in application.
the tax opinion may have access to information and Like any other type of liability, one tries to avoid it.
a duty to disseminate it, but he is not a guarantor of Liability to third parties is far more daunting. It can
the success of the transaction. arise in all sorts of factual situations, and can attach
One may suggest infinite variations in such fact pat- under the guise of various legal theories.
terns. For example, should the situation change if the Indeed, each state may have adopted some or all
non-client’s attorney reviews the opinion and advises of these theories, and some states tailor them for
the non-client he is skeptical that the transaction is their particular needs. Often, suit will be brought
viable? Again, there may be a continuum of advice under many theories, a true shotgun approach. Un-
offered by the non-client’s own lawyer. The advice derstanding your potential liability may seem quite
he offers may not be skepticism, but instead a firm overwhelming, particularly given the amorphous
view that the transaction lacks merit. nature of these rules. Common sense, however, can
This latter fact pattern suggests an implicit assump- go a long way here.
tion of risk defense for the author of the opinion. After Even so, these myriad rules are unlikely to prevent
all, how could the non-client claim to have justifi- attorneys from issuing opinion letters to non-
ably relied on the tax opinion, if his own counsel clients, particularly using a broad notion for what
has advised him that he should not rely upon it? I constitutes an opinion. The existence of potential
suspect that a deciding factor in this determination liability should remind attorneys that providing

72 CCH Draft
January 2008

opinion letters to non-clients may either create or this new era, it is not farfetched to wonder about the
modify a duty to non-clients. Underscoring this all status of emails too. Many forms of communication
is a nettlesome lack of precision about what may may import or enhance liability. Indeed, e-mails
constitute an opinion. Sometimes what looks and may well represent the great blackhole of the future.
sounds like an opinion to one attorney, client, ad- Many seem to regard e-mails as oral communications,
versary or judge, may be something that appears characterized by casual banter, a lack of formality
to be quite innocuous. and lack of signature. Yet, their import in lawsuits is
Clearly, something need not be labeled as an anything but casual.62
“opinion letter” to be so considered. Particularly in Be careful out there.

* This discussion is not intended as legal them to invest in abusive “FLIP” and other Citizens State Bank v. Timm, Schmidt & Co.,
advice, and cannot be relied upon for any tax schemes that cost them millions in back 113 Wis. 2d 376 (1983).
purpose without the services of a qualified taxes and penalties. The plaintiffs allege Ark. Code Ann. Section 16-22-310 (Supp.
professional. that defendants and certain other parties 1997).
1 12
ABA Model Code of Professional Respon- engaged in a scheme to defraud Plaintiffs See Eisenberg, Attorney’s Negligence and
sibility, Canon 7 (1986); see also Model and others similarly situated in connection Third Parties, 57 N.Y.U.L. Rev. 126 (1982);
Rules of Professional Conduct rule 1.3 cmt. with certain tax strategies by fraudulently Zipursky, Legal Malpractice and the Struc-
1 (1993). misrepresenting that the tax strategies would ture of Negligence Law, 67 FORDHAM L. REV.
A quick glance at accountant liability ap- reduce tax liability and were “more likely 649 (1998).
pears to suggest that accountant liability than not” to be approved by the IRS when See Greycas, Inc. v. Proud, 826 F2d 1560,
is evaluated in a similar fashion to lawyer in fact defendants knew that the tax strate- 1563 (7th Cir. 1987).
liability. See generally, Credit Alliance v. gies were abusive tax shelters that would Id.
Arthur Andersen & Co., 483 NE2d 110, at not pass IRS scrutiny. Plaintiffs allege the Id., at 1563.
118 (before accountants may be held liable defendants are liable on multiple theories, Geaslen v. Berkson, Gorov and Levin, 200
in negligence to noncontractual parties including fraud, civil conspiracy, breach of Ill. App. 3d 600 (1991).
who rely to their detriment on inaccurate fiduciary duty, breach of contract, profes- Id., at 605.
financial reports, certain prerequisites sional malpractice, unjust enrichment, and Id., at 606.
must be satisfied: (1) the accountants must the charging of unethical, excessive and Id., at 607.
have been aware that the financial reports illegal fees.). But see, United Bank of Kuwait PLC v.
were to be used for a particular purpose or Whitney v. Buttrick, 376 N.W. 2d 274 (Minn. Everture Energy Enhanced Oil Recovery,
purposes; (2) in the furtherance of which a Ct. App. 1985), appeal after remand at, 1989 755 FSupp 1195 (S.D.N.Y. 1989) (where a
known party or parties was intended to rely; Minn. App. LEXIS 1366 (Minn. Ct. App. Jan. non-client asked for an opinion letter and
and (3) there must have been some conduct 2, 1990). the law firm provided it without informing
on the part of the accountants linking them Winterbottom v. Wright, 152 Eng. Rep. 109 its client, the court did not hold the law firm
to that party or parties, which evinces the (Ex. 1842). liable for negligent misrepresentation).
5 21
accountants’ understanding of that party or Savings Bank v. Ward, 100 US 195, at 200 Roberts v. Ball, Hunt, Hart, Brown & Baer-
parties’ reliance); Frymire-Brinati v. KPMG (1879). witz, 57 Cal. App. 3d 104 (1976).
6 22
Peat Marwick, 2 F3d 183, at 189 (7th Cir. See, in general, MacPherson v. Buick Motor See supra for the list of factors.
1994) (accountants are liable to investors Co., 217 N.Y. 382 (1916) (manufacturers Id., at 111.
who rely on their work product only if owed a duty of care to consumers if the Id.
they intend the use eventually made of the article sold was reasonably certain to be Id.
financial statement. To establish liability dangerous if negligently made despite lack Id.
a plaintiff must show that the auditor (or of privity); Mentzer v. Western Union Tel. Id.
other professional) was aware that the report Co., 93 Iowa 752 (1895) (telegraph company B.L.M. v. Sabo & Deitsch, 55 Cal. App. 4th
would be used for a particular purpose, in owes a duty of care to addressee of intended 823, 834 (1997).
furtherance of which a known third party telegraph despite lack of privity). Bily v. Author Young & Co., 3 Cal. 4th 370
would rely, and the professional must show Glanzer v. Shepard, 233 N.Y. 236 (1922). (1992).
8 30
an understanding of this impending reli- But see Ultramares Corp. v. Touche, 174 Id. at 832, quoting Johnson v. Superior Court,
ance); Sharp v. Coopers & Lybrand, 649 F2d N.E. 441 (N.Y. 1931) for limitations places 38 Cal. App. 4th 463, at 472 (1995).
175, at 184 (3rd Cir. 1981), cert. denied, upon Glanzer, both opinions by Justice Wright v. Compton Prewett, Thomas &
455 US 938 (1982) (recognizing securities Cardozo. Hickey, 315 Ark. 213 (1993).
9 32
fraud claim against accounting firm based The case opening the floodgates to change Id. at 214.
on materially false representations con- was Biakanja v. Irving, where, the Califor- Id.
tained in an opinion letter) and; in the latest nia Supreme Court rejected strict privity of Id., at 215.
of KPMG LLP’s woes, see Simon v. KPMG contract in favor of a balancing of factors Id., at 217.
LLP, 97 A.F.T.R.2d (RIA) 2806 (D. NJ June approach. See Biakanja v. Irving, 49 Cal. See generally, Fortson v. Winstead, 961 F2d
2, 2006)(plaintiffs granted motion to certify 2d 647 (1958). 469 (4th Cir.) (1992); Wilkerson v. Sternstein,
class and approve settlement of damage See Trask v. Butler, 123 Wash. 2d 357 961 F2d 469 (4th Cir. 1992); Latimer v. Hall
claims against tax firm and other profes- (1992); Credit Alliance Corp. v. Arthur Financial Group, 1991 U.S. Dist. LEXIS
sionals who allegedly fraudulently induced Andersen & Co., 65 N.Y.2d 536 (1985); 2033 (N.D. Ill.)(1991); Ahmed v. Trupin, 809


Liability for Tax Opinions: What’s an Opinion and Who Can Sue?

FSupp. 1100 (S.D. N.Y.)(1993); and Hudson supporting documents failed to suggest claim to have relied. Moreover, the court
v. Capital Management International, Inc., the existence of any relationship between stated that the cautionary statements must
565 FSupp. 615 (N.D. Cal.) (1983). the parties approaching privity, sufficient be substantive and tailored to the specific
Eisenberg v. Gagnon, 766 F2d 770 (3rd Cir. to support a claim in ordinary negligence. future projections, estimates or opinions
1985), cert. denied, 474 US 946 (1985). Id., at 73. The Court utilized a three-part in the prospectus which the plaintiffs chal-
Eisenberg, id., at 776, quoting McLean v. test established in Credit Alliance Corp. lenge. Id. The court found that “bespeaks
Alexander, 599 F2d 1190, at 1198 (3rd Cir. v. Andersen Co., 65 NY2d 536 (1985), caution” doctrine did not apply because
1979). remitter amended 66 NY2d 812 (1985) the opinion letters did not contain state-
Id. at 779. for determining when accountants may ments from which plaintiffs should have
Turtur v. Rothschild Registry International, be held liable in negligence to noncon- inferred the risk that Arvey was knowingly
26 F3d 304 (2nd Cir. 1994). tractual parties who rely to their detriment and recklessly misstating the structure of
The defendants removed the case from the on inaccurate financial reports. The three the entire First Western trading program.
Texas state court to the U.S. District Court part test includes an analysis of whether Id., at 487.
for the Southern District of Texas. The district (1) the accountant must have been aware Id., at 488, quoting Straub v. Vaisman & Co.,
court dismissed the Texas state claims. Id., that the reports were used for a particular 540 F2d 591, 598 (3rd Cir. 1976).
at 306. purpose; (2) a known party was intended to Id., at 488.
42 53
Id., at 307. rely on the reports for the furtherance of the E.L. Price, 88 TC 860, Dec. 43,833 (1987).
43 54
Id., at 310. purpose; and(3) and there must have been See also, Ackerman v. Schwartz, 947 F2d
See Gilmore v. Berg, 761 FSupp 358 some conduct on the part of the accountant 841 (7th Cir. 1991). (Ackerman investors
(D.N.J. 1991). (Gilmore involved a claim linking him to that party which evinces the brought a suit against a law firm that wrote
against an attorney, who in a tax opinion accountant’s understanding of that party’s an opinion letter concluding that the
letter, represented that the purchase price reliance. Id. The test has been applied to investors were entitled to certain deduc-
of the real property involved in the tax other professionals as well (See, Viscardi v. tions for their investments in a tax shelter.
shelter at issue was fair “as determined by Lerner, 125 AD2d 662 (2d Dept 1986)(the The opinion letter recited facts that made
the general partner.” Id., at 370. Plaintiffs court dismissed a complaint for failure to the transaction seem legitimate, but were
contended that the attorney knew that state a cause of action due to the lack of fictitious. The letter cautioned that the firm
the property had been purchased out of privity between sisters and the attorneys had “relied on unnamed persons for speci-
bankruptcy for less than one-half the stated who drafted the subject will)). The court fied facts,” id., at 843, and added that “we
price. The court stated: “[T]he court agrees found that the plaintiffs failed to meet the have not made an attempt to independently
with the plaintiffs that a jury could find [the Credit Alliance test. While the plaintiffs verify the various representations.” Id. The
attorney’s] statement that “the purchase allege that the defendant law firms were court held that the district court’s grant
price of $5.3 million reflects the fair market aware that their tax opinion letters were of summary judgment in favor of the law
value of the property as determined by to be relied upon by potential investors firm was improper. The court reasoned that
the general partner” is grossly misleading and that they, in fact, were relied upon summary judgment was improper because
as to constitute actionable fraud in failing by plaintiffs, there was no allegation or [under Rule 10b-5] the lack of an indepen-
to disclose important facts underlying the evidence of conduct by defendants, such dent duty to ‘blow the whistle’ does not
determination of fair market value. [The as communications with potential inves- excuse a material lie. Id., at 848.)
attorney] seeks to exculpate his mislead- tors, evincing their understanding of such Circular 230, Section 10.35, states that a
ing statement by pointing to the qualifying reliance.) Id., at 74. “covered opinion” is written advice (in-
language, ‘as determined by the general In Judge Jon Mewman’s concurring opin- cluding electronic communications) by a
partner.’” However, plaintiffs presented ion, he states that “strict insistence that practitioner concerning one or more federal
evidence that the attorney knew the fair the investor see and rely upon the opinion tax issues arising from (1) a “listed” transac-
market value of $5.3 million was unsup- concerning the precise investment in which tion; (2) a plan or arrangement which has a
portable. The court denied the defendant he placed his money eliminates a needless principal purpose is to avoid or evade tax;
attorney’s motion for summary judgment ground of controversy.” Turtur, at 312. or (3) a plan or arrangement which has a
and remanded.) Kline v. First Western Gov’t Sec., 24 F3d 480 “significant” purpose of tax avoidance or
See also Alpert v. Shea Could Climenko, (3d Cir. 1994). evasion but only if the written advice is a
160 A.D. 2d 67 (New York 1990) (Plaintiffs Id., at 486, quoting Herskowitz v. Nutri/ “reliance opinion,” “marketed opinion,” or
faced a substantial income tax liability and System, Inc. 857 F2d 179, at 184 (3rd Cir. subject to conditions of confidentiality or
decided to invest in a tax shelter to obtain 1988), cert. denied sub nom. Nutri/System, contractual protection.
tax deductions related to royalties for the Inc. v. Herskowitz, 489 US 1054 (1989). Id.
49 57
right to mine coal. The IRS disallowed the The Court denied Arvey the use of the See B.L.M., supra note 50, 55 Cal. App. 4th
deductions and the plaintiffs sued the law “bespeaks caution” doctrine: “under that (1997).
firms that issued tax opinions (reasonable doctrine when an offering document’s See Lama Holding v. Shearman & Sterling,
basis) related to the investment. The plain- forecasts, opinions or projections are 758 FSupp. 159 (S.D.N.Y. 1991).
tiffs claimed that the law firms committed accompanied by meaningful cautionary Id., at 161.
fraudulent misrepresentation and sought to statements, the forward-looking statements Id., at 161.
amend their initial complaint, which failed will not form the basis for a securities fraud Kline v. First Western Gov’t Sec., 24 F3d 480
to state such a claim. claim if those statements did not affect (3d Cir. 1994).
The court denied the plaintiffs’ motion the ‘total mix’ of information the docu- See generally, Another Giant Falls in
to amend. The court reasoned that there ment provided investors. In other words, Quattrone, The Street.com, May 3, 2004
was no support for the conclusion that a cautionary language, if sufficient, renders (The case against Frank Quattrone, a
fiduciary relationship existed between the the alleged omissions or misrepresenta- former Credit Suisse First Boston banker,
plaintiffs and defendants in the absence tions immaterial as a matter of law.” Id. stemmed from a single e-mail in which
of a contractual relationship. Moreover, The court noted that the disclaimers must Quattrone recommended that his staff
the court found that the complaints and relate directly to that on which investors clean out their files).

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