In what could be a first of it’s kind action in the municipal bond market, the Internal Revenue Service has suspended tax-exempt bond attorney Michael W. McCall for at least 24 months from practicing before it for writing a false tax opinion.
McCall, who practiced at the former law firm Schuering, Zimmerman & Scully in Sacramento, admitted to giving false opinions “knowingly, recklessly, or through gross incompetence” and failing to exercise due diligence in violation of Circular 230, the IRS’ Office of Professional Responsibility stated in a release yesterday. Circular 230 governs the practice of tax lawyers that come before the IRS.
“Practitioners have a duty to their clients, the system, and the municipal finance bond community to ensure that the tax advice they are giving their clients complies with the law and is complete and accurate,” OPR director Karen L. Hawkins said.
The IRS said McCall can petition to be reinstated following his suspension, but several attorneys questioned whether he is still a participant in the municipal bond market. McCall could not be located in the National Association of Bond Lawyers’ list of members or other directories and an IRS spokesperson could not say whether he is still working as a bond attorney.
But bond lawyers said the action may mark the first time a bond attorney has been suspended by the IRS.
The release did not specify the transaction for which McCall delivered a false opinion, but the general description of it matches a 2000 deal in Washington state for which McCall was co-bond counsel.
In that deal, the bonds were illegally issued by an arm of the Holmes Harbor Sewer District to finance an office building project that was outside its jurisdiction. The debacle led to bondholder lawsuits and Securities and Exchange Commission enforcement action against transaction participants, including McCall.
The dispute involved some $20 million of tax-exempt bonds that were sold in October 2000 by a local improvement district, created by the sewer district, to finance the development of an office park. In August 2001, the state auditor issued a report concluding that the bonds were not validly issued because the project was outside the sewer district’s area of jurisdiction.
The office park was never built, but more than half the proceeds of the bonds were used for land acquisition and fees. The bonds went into default in 2002.
Bondholders sued transaction participants in October 2001, eventually obtaining more than $15 million from settlements and funds connected with the project, including $1.6 million from McCall and co-bond counsel Charles Tull, formerly of Langabeer, Tull & Lee PS in Bellingham, Wash., as well as the sewer district and four of its commissioners. The bondholders also received $2.9 million in settlements with U.S. Trust Co. NA, the trustee for the bonds, and Wedbush Morgan Securities Inc., a broker-dealer that sold some of the bonds.
The bondholders also obtained $9.9 million in undisbursed bond proceeds that were held by the trustee and about $2.28 million from the sale of property on which the office park was to be built.
The SEC barred investment banker Kenneth R. Martin, formerly with the now-defunct brokerage firm IBIS Securities LLC, from the securities industry for at least five years for his role in the deal. A federal judge also ordered him to pay roughly $60,000 in ill-gotten gains to the federal government.
Washington courts ultimately found that Prudential Securities Inc., now Wachovia Securities LLC, did not violate state securities law by selling most of the bonds, since the firm claimed that it did not help prepare the disclosure documents and only reviewed them to make sure the bonds were appropriate to sell to investors.