Representing a married couple always brings with it the risk that the interests of the two parties won’t be in alignment, creating a conflict of interest issue.  That may be true even when the adviser reasonably concludes that both spouses agree to a course of action, that initial “waiver” of the conflict does not serve to ensure that the same conflict won’t again become a problem in the engagement.

The case of Gebman v. Commissioner, TC Memo 2017-184 deals with issues that arose for an attorney representing a client before the Tax Court, but similar issues and problems can arise for CPAs well before a tax dispute ends up in court, so a review of what happened in this case is useful for all practitioners.

The situation began when the attorney in question decided to do something good and offer up his services for free to Tax Court litigants who arrived at Court without representation under a program operated by the New York County Lawyers’ Association.  Mr. Gebman was offered the opportunity by the Court to speak with a volunteer lawyer before his case was heard that afternoon and Mr. Gebman took advantage of the opportunity.

The attorney was not terribly impressed with the taxpayer’s case.  As the Court noted:

…[W]ith respect to petitioners' assignments of error, he told Mr. Gebman during their January 30 meeting that petitioners' assignments were frivolous (i.e., in Mr. Agostino's words: "not well grounded in fact or warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law"). See Goff v. Commissioner, 135 T.C. 231, 237 (2010) (similarly defining "frivolous"); Model Rule 3.1 (similar). He told Mr. Gebman that prosecution of his claims could "(a) result in the imposition of sanctions pursuant to IRC sec. 6673; and (b) have collateral consequences to Mrs. Gebman." He also told him that he would not represent him in challenging the notice of deficiency or in asking the Court to reconsider its [*11] denial of his request for a continuance. He did, however, offer "to represent Mr. Gebman, and/or supervise the representation of Mr. Gebman, with respect to the prosecution of the post-assessment collection alternatives available to him under IRC sec. 6330" ("Notice and Opportunity for Hearing Before Levy."). He states that, shortly before recall of the case, "Mr. Gebman told me that he would concede the deficiencies in tax and the penalties after I refused to enter an appearance on his behalf."

As part of his attempt to protect Mrs. Gebman from collateral damage, he noted that he planned to offer up an innocent spouse defense for her.  Since part of the assessment resulted from failure to report IRA distributions from Mrs. Gebman’s account, the attorney planned to present evidence that Mr. Gebman had fraudulently withdrawn the funds without Mr. Gebman’s consent. 

Believing that there was a plan in place, the attorney returned to Court with Mr. Gebman, appearing as representative of Mrs. Gebman.  As the opinion describes that hearing:

We recalled the case at 1 p.m., at which time Mr. Gebman again introduced himself, and Mr. Agostino stated that he would be entering an appearance for Mrs. Gebman. We asked whether there was anything preliminary to discuss. Mr. Agostino stated: “Yes. Your Honor. With respect to Clark Gebman, Mr. Gebman will be conceding the deficiency in full.” We inquired: “Are you representing him?” Mr. Agostino said that Mr. Gebman would get up. Mr. Gebman arose and said: “I would do as John was saying.” We assume that he meant “Frank” (i.e., Mr. Agostino), and Mr. Agostino agrees. We then asked: “Okay. So a concession to the deficiency in full by petitioner husband?” Mr. Agostino replied: “Yes.” Respondent’s counsel then asked about the penalty, and Mr. Agostino added: “And penalty.” We inquired of Mr. Gebman as to the penalty. He responded: “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. And I am fully prepared to, whatever I can within my means to do so.” He agreed to concede the penalty.

Discussion then turned to Mrs. Gebman, whom Mr. Agostino said wished to raise an innocent spouse defense. He recognized that Mrs. Gebman required leave of the Court to amend the petition in order to raise the defense. Following additional discussion, the Court agreed to continue the case to give Mrs. Gebman time to move for leave to amend the petition to raise an innocent spouse defense. Mr. Agostino represented that Mrs. Gebman would stipulate the correctness of all of respondent’s adjustments and penalties, relying only on the innocent spouse defense that she hoped to raise. The Court asked Mr. Gebman whether he agreed to that, and he responded that he did. By order dated January 30, we continued the case and gave Mrs. Gebman until March 1, 2017, to move for leave to amend petition. On January 30, we filed Mr. Agostino’s appearance on behalf of Mrs. Gebman.

All is well so far, with the attorney representing the wife in what would be an innocent spouse defense and Mr. Gebman conceding all of the tax deficiency.  The attorney was also aware that Mr. Gebman had little income and few assets, so even though he would be stuck with a large balance due, the IRS most likely would be forced to classify his account as “currently not collectible” so there likely wouldn’t be any real negative consequence for Mr. Gebman.

But a problem arose—Mr. Gebman had a change of heart shortly thereafter.  He still wanted his wife protected, but he now wanted to fight the tax assessments and all of the IRS adjustments, including the IRA distribution issue. 

The Tax Court found that this create a conflict of interest issue for the attorney.  While the attorney attempted to get Mr. Gebman to sign a waiver, Mr. Gebman refused to sign the document.  The attorney argued that he had never been Mr. Gebman’s attorney and, in any event, there would be negative consequence to Mr. Gebman if Mrs. Gebman succeeded in obtaining innocent spouse relief.

The Court disagreed.  First, the Court noted that responsibilities to avoid conflicting interests involve not just clients, but also individuals who do not become clients but who consulted with the attorney.           In this case it was a bit complicated, with the Court concluding that Mr. Gebman was a client for a short period of time, but that by now Mr. Gebman was a former client. 

As the Court explained the issues:

While Mr. Agostino was not counsel of record for Mr. Gebman, he formerly represented Mr. Gebman in connection with the tax dispute before us. As used in the Model Rules, the verb “represent” is a term of art. The preamble to the Model Rules, in discussing a lawyer’s responsibilities, describes a lawyer, as among other things, “a representative of clients” and further states that, “[a]s a representative * * * a lawyer performs various functions”, including, among others, “advisor”, “advocate”, “negotiator”, and “evaluator”. Model Rules, preamble, r. 1.8(a) cmts. Mr. Agostino concedes that he acted both as an adviser and as an evaluator to Mr. Gebman and as an advocate and negotiator to Mrs. Gebman. We now consider whether Mr. Agostino is representing Mrs. Gebman in the same, or substantially the same, matter as that in which he represented Mr. Gebman, whether Mrs. Gebman’s interests in the matter are materially adverse to Mr. Gebman’s interests, and (since we find that her interests are materially adverse to his interests) whether Mr. Agostino obtained from Mr. Gebman informed consent in writing.

The Court, evaluating the issues, concluded that the attorney’s argument to obtain innocent spouse relief for Mrs. Gebman would directly violate his duties to Mr. Gebman, and that no informed consent had been obtained from Mr. Gebman to allow him to move forward regardless:

As framed by the notice of deficiency and the petition, the legal dispute before us is whether respondent may assess against petitioners some or all of the deficiencies and penalties that he determined. Mrs. Gebman has agreed to concede that the adjustments and penalties are correct, but she would like to be relieved of liability for the tax and penalties with respect to at least the IRA distributions on the grounds that, with respect to the resulting tax liabilities and penalties, she is an innocent spouse, or, to put it another way, that omission of the IRA distributions from petitioners’ joint income was an erroneous item of Mr. Gebman’s or that he fraudulently converted the IRA distributions to his own use and should have reported the resulting income. Facts concerning the IRAs are central to her innocent spouse defense. Mr. Gebman may dispute the facts as Mrs. Gebman construes them, or he may construe them differently. In any event, his defense of their joint return position and her innocent spouse claim involve the same transactions (IRA distributions) and a dispute as to their tax consequences. Mr. Gebman’s intent to defend their return position (if allowed to) puts Mr. Agostino (in representing Mrs. Gebman) on the other side from Mr. Gebman (he says that the IRA distributions were not includible in their gross income, she would concede that they were, and, moreover, she wants to claim that it was his (and not her) income).

Representing spouses always has the inherent risk of conflict of interest issues.  In this case the attorney reasonably concluded at his meeting with the taxpayer just before the Court appearance that he had permission to proceed with a defense of the spouse.

But even if there was a waiver (and, in this case that waiver was never reduced to writing), such a waiver is permission to go forward “for now” and fails to apply if there is a material change in circumstances.  In this case, the husband’s decision to attempt to get his original concession of the liabilities reversed was just such a material change in circumstances.

While this case involved the specific provisions of the American Bar Association’s Model Code of Conduct as applied to attorneys, the rules that apply for all engagements to CPAs via the AICPA Code of Professional Conduct and to CPAs, EAs and attorneys under Circular 230 when representing clients before the IRA are either very similar or identical to the ABA rules.  Even when being a “nice guy” and handling matters without a fee, the adviser must still follow these rules.