A bond lawyer for a transaction under scrutiny by the Internal Revenue Service who also wants to become the tax controversy counsel representing the issuer before the agency should be aware of a conflict of interest rule that was recently toughened by the IRS, an attorney warned last week. Frederic L. Ballard, Jr., a partner at Ballard, Spahr Andrews & Ingersoll LLP, talked about the conflict of interest rule and issued the warning while giving an update on Circular 230 Thursday during a teleconference on ethics issues that was sponsored by the National Association of Bond Lawyers.Circular 230 contains rules that govern the practice of tax lawyers that come before the IRS. Bond lawyers, who typically give the opinions that bonds are tax-exempt, are considered to be among the tax practitioners that are covered by Circular 230.The bulk of the Circular 230 revisions finalized in late September by the IRS do not apply to bond lawyers, Ballard noted during the teleconference, saying that he did not want to suggest that a “cosmic shift” in these rules had occurred for the muni market.The IRS is still re-evaluating special Circular 230 rules that it proposed for bond lawyers in December 2004. However, the rules approved in September contain a revised conflict of interest rule that applies to all tax practitioners, even bond lawyers, Ballard said. Under that revised rule, if a bond lawyer has a conflict of interest the issuer must, in writing, waive the conflict and give informed consent within 30 days after the conflict is discovered.The rule states: “Each affected client [must waive] the conflict of interest and give ... informed consent, confirmed in writing. The confirmation may be made within a reasonable period after the informed consent, but in no event later than 30 days.”Ballard told lawyers during the teleconference: “In the muni world, the only place where this comes up is in a tax audit” when the lawyer that served as bond counsel for the transaction wants to also become the tax controversy counsel representing the issuer before the IRS. Other speakers on the teleconference agreed.One caller asked if a conflict of interest would be created when a bond lawyer representing an issuer is trying to get the underwriter to certify the issue price of new bonds and the underwriter, which the lawyer’s law firm represented in an earlier deal, does not want to do so. The caller said the lawyer, whose firm had a previous relationship with the underwriter, might not push that hard for the certification.Most of the speakers at the teleconference did not think that situation would present a conflict of interest.The new conflict of interest rule is tougher than a previous IRS rule that was adopted in 2005, as well as the American Bar Association’s model rule 1.7, which deals with conflicts. The IRS’ previous rule had required the issuer or other client to give informed consent, which would then have to be confirmed in writing. But the rule did not specify the party that had to confirm that consent had been given and did not provide any timeframe for the confirmation.ABA model rule 1.7 permits issuers or other clients to give informed consent to conflicts of interest verbally, as long as the lawyer documents in writing that consent has been given. ABA rules are not binding but are often adopted by state bar associations.Some of the NABL members speaking at the teleconference pointed out that a number of states do not permit government officials to consent to conflicts of interest, no matter what IRS rules or ABA rules require.
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