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March 1, 2005

Sexton v. I.R.S. (9th Cir., Mar. 1, 2005) 05 C.D.O.S. 2379

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The Ninth Circuit holds that there is no conflict when an attorney represents a taxpayer in a suit against the I.R.S. and is concurrently employed as a consultant by the I.R.S. in an unrelated matter.

Ann Sexton Peterson, executor of the estate of Lucille Abbott Sexton, filed a return showing estate tax liability of $68,894.  An audit of the return led the I.R.S.  to increase the estate tax to $415,868 and to assess a gift tax.  Dennis Harkavy was counsel for the estate and Peterson in proceedings to protest the tax.

Peterson rejected an offer to reduce the gross estate by twenty-five percent.  As the case neared trial the judge initiated a call to counsel for both parties and indicated that Peterson probably would not prevail.  Harkavy informed Peterson of the communication and recommended the prior settlement offer, which she agreed to.

When Peterson’s petition was pending, Harkavy submitted a bid in response to a request that the I.R.S. sent to all names on a real estate expert referral list.  Harkavy disclosed that he represented taxpayers, but did not disclose the name of any clients.  The I.R.S. officer was unaware of the Sexton case.  The officer selected Harkavy to serve as an expert on the basis of price, experience, and expertise.

Peterson sought to set the settlement aside alleging Harkavy breached his ethical obligations and did not properly represent the estate.  The Tax Court held that there was no credible evidence that Harkavy failed to properly represent the estate.

Representation of the I.R.S. in the consulting matter was not directly adverse to the representation of the estate.  The cases were entirely unrelated.  No evidence was produced that representation of the estate was materially limited by Harkavy’s responsibilities to the I.R.S.  or to his own interests.  Harkavy’s selection by the I.R.S. was not related to his representation of the estate.  No showing was made that Harkavy’s loyalty to the estate was diluted by his services to the I.R.S.

The court refused to interpret the American Bar Association’s Model Rule of Professional Conduct 1.7 to mean that any time a lawyer represents a private client confronting a government agency, the lawyer can do no work of any kind for that agency.

Peterson argued that Harkavy violated California’s Rule of Professional Conduct 3-310(C) that provides that a lawyer shall not “represent a client in a matter and at the same time in a separate matter accept as a client an entity whose interest in the first matter is adverse to the client in the first matter.” Harkavy did not violate this rule because his work for the I.R.S. did not and could not
have put at risk secrets that Peterson valued.  The court refused to interpret the rule to effectively impede the I.R.S.  from obtaining the expert aid of practicing members of the tax bar.

Comment: According to this case, a lawyer who represents a client against a government entity can perform services for the entity as long as the work and the selection by the entity have no connection to the work for the client and the lawyer does not risk disclosing the private client’s secrets.  Nonetheless, it should be noted that this is a unique situation in which the lawyer was contacted by the I.R.S.  to serve as an expert in a wholly unrelated matter.

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