WASHINGTON — The Internal Revenue Service’s Office of Professional Responsibility announced yesterday that it had reached a “ground-breaking settlement” with two lawyers — Michael C. Ormsby and David O. Thompson — over alleged tax disciplinary rule violations in connection with $31 million of municipal bonds sold nine years ago to finance a parking garage for a mall in Spokane, Wash. Ormsby and Thompson are at Kirkpatrick & Lockhart Preston Gates Ellis LLP, formerly Preston, Gates & Ellis LLP, the bond counsel for the transaction, which the IRS declared taxable in 2004. The agency settled tax charges with the issuer in 2006 to preserve the tax-exempt status of the bonds.An IRS spokesman said the settlement is ground-breaking because it is the first ever publicized by OPR. Several lawyers in the muni market said they are unaware of any other such actions taken against bond lawyers.More cases of this kind are likely forthcoming next year, according to current and former IRS officials.“The [IRS] Office of Tax-Exempt Bonds made quite a few referrals to OPR in 2004 and 2005,” said W. Mark Scott, a partner at Vinson & Elkins LLP here who formerly headed the office. Clifford Gannett, who declined to comment on the settlement, indicated yesterday that TEB has made a number of referrals to OPR.In its audit of the Spokane parking garage, the IRS said the 1998 bonds were not qualified private-activity bonds because the proceeds were used as collateral for private loans for the construction of a garage and department store. It also charged that the Spokane, Wash., Downtown Foundation was not qualified to issue debt on behalf of the city.The foundation reached a settlement on the tax law violations with the IRS in February 2006, one of a complicated series of disputes and lawsuits that extend back to before the bonds were issued. In a separate examination, OPR alleged that Ormsby’s and Thompson’s actions in the transaction ran afoul of four sections of Circular 230, which sets forth disciplinary standards for lawyers practicing before the IRS, including bond lawyers. OPR did not detail the allegations in its settlement announcement yesterday, but the relevant sections of Circular 230 cited are entitled: diligence as to accuracy; conflicting interests; standards for advising with respect to tax return positions, and for preparing or signing returns; and incompetence and disreputable conduct. Ormsby and Thompson denied the charges.Under the settlement, the two lawyers agreed to comply with the practices and procedures implemented by their firm’s public finance group, including filling out questionnaires and checklists to document their due diligence activities on transactions. Ormsby and Thompson also agreed that, for the next 18 months, the opinions they write for certain transactions will be reviewed and approved by the leader of the firm’s public finance group, who is also a member of the firm’s opinion committee.“The settlement does not constitute any admission of wrongdoing by, or a sanction of, the attorneys,” OPR said yesterday. The office also said the “implementation of such practices and procedures is appropriate for municipal bond attorney practice.”Ormsby and Thompson could not be reached for comment. But K&L Gates stated: “We’re pleased to have this matter resolved,” and pointed out that the lawyers were not sanctioned and did not admit wrongdoing. A spokesman for the firm said the policies and practices that the lawyers are to follow are currently in place at the firm.Mark Schwartz, a lawyer in Bryn Mawr, Pa., who represented Spokane taxpayers who tried to prevent the bonds from being issued, yesterday called the settlement “a farce.” “This deal was a total sham,” he said. “And to basically say they are subject to the procedures and policies of their own firm? Big deal. It’s a joke. Bond opinions are supposed to be approved by a firm anyway, so what’s new here?”But other lawyers said that it is extremely unusual for the IRS’ OPR to name lawyers, particularly those from a large firm, in a disciplinary case.Frederic L. Ballard Jr., a partner at Ballard Spahr Andrews & Ingersoll LLP, said, “I don’t think it’s a slap on the wrist to be named in an announcement of a settlement with OPR.”“It’s a black eye,” said another attorney who did not want to be identified.Several lawyers said the settlement may change some firms’ practices.“What we’re seeing for the very first time is a statement by OPR that individual attorneys need to act in concert with the procedures and policies that are in place within their firms and can’t act alone,” said Jerry Spector, a partner at Mintz Levin Cohn Ferris Glovsky and Popeo PC in New York.“I think it’s going to engender a lot of discussion,” Spector said. “There will be some firms that will look at this press release and think through whether they want to establish procedures and policies to document their due diligence, such as completing questionnaires and checklists.” Currently, firms have practices that differ with regard to due diligence and other matters, he said.Spector also said the matter is serious for the two lawyers. “Nothing really rises to a Circular 230 violation without willful or reckless behavior,” he said.John H. Burton Jr., a lawyer at Presley Burton & Collier LLC in Birmingham, said, “It’s a positive development that addresses quality and focuses on best practices rather than penalties.”

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