Monday is my law school roommate’s birthday. I know the correct date even without Facebook asking me if I’d like to buy him a Starbucks Gift Certificate.
(Incidentally, this might be the absolute Apex of Impersonal Gift-Giving — a gift certificate to the largest national chain of franchises that serve the most commonly-consumed beverage, prompted by and delivered through a social networking site that reminded the gift-giver of the recipient’s birthday automatically. I’m not sure where you would add extra generic even if you wanted to. Maybe if the card substituted the recipient’s social security number for their name. At least the SS# would be unique….)
This year, my law school roommate’s birthday happens to coincide with Patriots Day here in Massachusetts, which is when they run the Boston Marathon. By “they,” of course, I mean “people who are able to run the Boston Marathon, or at least attempt it, which is Very Impressive Indeed.” Me, I just watch and cheer at Heartbreak Hill. Usually with these guys.
Of course, my law school roommate (“Joe”) ‘s birthday … ah, heck. Bonus blog tip on legal drafting: You can’t define a term in a sentence in which you are using that term in the possessive. Just doesn’t work.
Anyway, Joe’s birthday only falls on Patriots Day once every seven years, so that is not how I remember it. No, I remember Joe’s birthday because it falls on Tax Day. (Sadly, Joe is not a tax attorney. I think he really missed out on some great synergies there.)
And with Tax Day right around the corner, I thought this would be a good time to talk about everything I know about tax law. (Don’t worry, it won’t take long.)
Just Enough Not to be Dangerous
People often joke about having limited knowledge in a field by saying they know “just enough to be dangerous.” I suppose this means that you have enough information that you fool yourself into thinking that you can handle the situation on your own, without seeking the advice of a real expert. For attorneys, this is a very dangerous practice. But complete ignorance of an area of law can be just as dangerous — attorneys need to know what they don’t know. (Hey, they didn’t name the method of teaching law students after this guy for nothing.)
For fields in which attorneys do not practice regularly, our mission is to know enough to help clients avoid pitfalls, at the very least by spotting where they might be lurking. “Issue-spotting” — the staple activity of law school exams — is more than just a fun-filled and rigorous academic exercise, it is also important training designed to ensure that lawyers know when to seek additional input, or advise their client to (*gulp*) get a lawyer. We can’t know everything, and shouldn’t pretend that we do. But we do need to understand all areas of law well enough to recognize situations in which the client needs some more specialized advice. Tax law is perhaps the best example: An area in which a little knowledge of a specialized field is vital to helping clients avoid traps for the unwary.
“Everything We Do is Controlled by Taxes.”
Even if Tax Day hadn’t been around the corner, I might have been prompted to write about today’s subject because of this quote. I recently met a tax attorney whose sales pitch included this line. It may be an exaggeration, but it’s still a good reminder of how pervasive tax law is in business and everyday living. All sorts of financial incentives (and disincentives) are attributable to the tax code, and it is important for attorneys to be able to spot when those issues might arise, so that clients can get good advice about how subtle changes in approach might make a big difference to their tax bills.
The example this tax attorney cited was a good one. He had litigated a case in which a settlement agreement resolving a variety of claims hadn’t allocated the settlement proceeds among the various claims in the lawsuit. Money recovered on account of a legal claim (whether through settlement or by obtaining a judgment) is treated differently for tax purposes depending on the nature of the claim. If the settlement document fails to specify that X amount is being paid on one claim, and Y amount is being paid on the other, you can expect the IRS to take the position that all of the proceeds should be attributed to whichever claim yields the most tax. That is, after all, part of its mission.
There are online resources and tax attorneys who can tell you the specifics of how particular claims are handled under the tax code, but the most important point for a litigator is that there are important differences, and that this is therefore an area in which the client (or the attorney) might need some specialized advice. If the attorney doesn’t know enough to get the advice, he can’t help the client make an informed decision.
(For that matter, in order to allocate settlement proceeds to a claim that has favorable tax treatment, that claim has to be in the complaint in the first place. So attorneys may need to consider the tax treatment of a potential recovery right at the outset of the case.)
A Little Help From My Friends
Nobody ever said that life at a big firm was easy (well, nobody who was employed by one a few months later, anyway), but practicing at one does have some advantages. If a big firm litigator has a tax question, she can usually just walk down the hall … get on the elevator, go down to the lobby, transfer to the elevator bank that goes to the floor where the tax department is, wait for the elevator, ride up to that floor, walk down another hall, wait for the tax attorney to get off the phone … and ask a tax attorney the question.
Me? I have to have friends (and colleagues who are on their way to being friends).
So when I find myself wondering how something the client needs to do should be treated on their books, I call one of my accounting friends (I have two of those). When it’s a question of how the IRS is likely to treat something in an audit, I consult one of my tax attorney friends (either the former actuary or the former IRS agent). And on the rare occasion when I need to know how the IRS might behave if auditing “push” comes to litigation “shove,” I buy a cup of coffee for the friend who used to try cases for the IRS. Even if the client needs to pay for an hour of one of these professionals’ time (and often they don’t), it can pay important dividends down the line.
This list of friends isn’t unique to tax law. It’s just one example of how small and solo law firms need to maintain a network of professionals that they can call upon when they spot an issue that is outside their area of specialization. But good lawyers need to know enough about these other areas of law to know when to pick up the phone and dial a friend.
(Oh, and when I spot a complicated bankruptcy issue that is outside of my comfort zone, I call Joe. Happy birthday, Joe!)
My tax attorney partner summarized the rule: “Whenever money changes hands, there are tax consequences. Whenever money does not change hands, there may be tax consequences.” Good blog post and fun to read.