When Hiring Outside Consultants, 
Look for Potential Conflicts of Interest

By John Garippa, As published by Real Estate Forum, July 2003

When Lawyers represent both taxpayers 
and taxing jurisdictions, they could set 
precedents that come back to injure clients.

It's critical for corporate professionals to have confidence in the outside consultants and attorneys they hire to represent their interests in tax appeals.  However, another less-obvious confidence issue concerns potential conflicts of interest these outside parties may have.  In the tax-assessment field, this is an issue that often goes unobserved.

The Sarbanes-Oxley Act was signed by President Busch on July 30, 2002 and protects investors by improving the accuracy and reliability of public corporations' disclosures.  It also affects how the public accounting profession will perform its function of auditing public companies.  Furthermore, it significantly changes the scope of non-audit services that auditors can offer clients.

For many years, accountants have engaged in advocacy on behalf of their audit clients in the area of evaluating and contesting property tax assessments on properties.  In their final rules concerning Sarbanes-Oxley, the SEC addressed this advocacy issue with the intent of taking accountants out of the business of providing support on behalf of an audit client when that interest is in litigation or regulation.  But the SEC moved even further in restricting the potential for conflict of interest in this regard by addressing the growing problem of accountants providing legal services to an audit client.  The SEC ruled that an accountant is prohibited from "providing any service to an audit client that, under the circumstances in which the service is provided, could be provided only by someone licensed, admitted or otherwise qualified to practice law in the jurisdiction in which the service is provided."

While Sarbanes-Oxley and its final rules allow accountants to provide tax services to their audit clients, those rules also make it clear that auditor independence must be scrutinized carefully and state that "accountants would impair their independence by representing an audit client before a tax court, district court or federal court of claims."

Public companies need to be made aware of these important regulations in the tax-appeal field.  Since tax appeals are generally handled throughout the US in either administrative hearings or in courts, these rules clearly outline the fact that accountants can no longer represent their audit clients in such arenas.

Lawyers are not immune to such conflicts of interest.  Too many times, a corporation hires attorneys and only worries if that law firm is handling another issue currently adverse to itself.  However, these conflict questions need to be addressed even more broadly in the tax appeal field.  The American Bar Association's rules of professional conduct outline a critical issue for lawyers by stating that "a conflict of interest exists if there is a significant risk that a lawyer's action on behalf of one client will materially limit the lawyer's effectiveness in representing another client in a different case."

It would then seem logical for corporations to ask their attorneys to represent only taxpayers.  When lawyers seek to represent both taxpayers and taxing jurisdictions, they inevitably place themselves in a position to set precedents that might come back to injure their clients.

An example of this would be a case where a lawyer representing a taxing jurisdiction argues that a statute defining the taxability of machinery and equipment ought to be broadly construed.  Such a broad statutory construction would allow additional elements of machinery and equipment to be taxable as real property and increase tax assessments for industrial taxpayers.  A lawyer making that argument must notify potential taxpayer clients of his or her arguments and litigation positions.  But does a company hiring an attorney have the right to be informed of this conflict of interest?  The law is absolutely clear on this point, stating that the client is entitled to be adequately informed.

Corporate property owners and tax managers must carefully assess the conflict issues as they question outside professionals.  An annual survey should be used to determine what cases and issues their outside professionals are currently advancing and how these issues could impact their own property.  Unfortunately, it's difficult for some professionals to voluntarily disclose issues that may cause the loss of clients.  Only by careful due diligence in engaging tax professionals can a company determine that its interests are represented without conflict.

John Garippa is the senior partner of Garippa, Lotz & Giannurio, a law firm based in Montclair, NJ, and president of the Chicago-based American Property Tax Counsel, an affiliation of property tax attorneys.  He may be contacted at john@taxappeal.com