I love accountants, and probably so should you. If I’ve said it once in the 35 years of my corporate law practice, I’ve said it a thousand times, “The tax tail wags the deal dog.”
There is rarely a business deal—particularly a merger/acquisition or business sale—that does not require an understanding of context by tax implications, with crafting or advice from the accountancy tax expert. My legal and accounting education (if not philosophy education) has taught me enough to know what I do not know, or at least to be prudently aware of the issue.
In the teaching circuit for CLE Continuing Legal Education (for attorneys) and CPE Continuing Professional Education (for accountants), I tend to give the instruction to each respective group of professionals to be mindful and disciplined to “stay in your lane.”
As a general rule, when I teach lawyers, this means referring tax issues to accountants, and when I teach accountants, this means referring legal issues to attorneys. There are professional licenses for the respective practices for a good reason.
Contrary to general knowledge, a CPA is not even professionally competent as an expert witness to opine to business valuation without the additional ABV or CVA certificate. In my experience, accountants without that certification tend not to tell their clients that they are not professionally competent to opine to business value, which requires that I explain it to clients who come to me saying that their accountant thinks the business is worth this or that.
Now, it might go without saying to say that tough business people are creatures of momentum, inertia, and efficiency, and, therefore, they tend not to want the overhead of getting an attorney for an “easy legal issue” or getting an accountant for an “easy accounting issue.” “Hey, can’t you just tell me what to do here? My other guys would just do it for me to make it easy.” “Um, no.” If I’ve said it once in the 35 years of my corporate law practice, I’ve said it a thousand times, “A one dollar product—or even a free product—can cause 1 million dollars of liability.” A “little” tax decision can be tax cost catastrophic.
For example, when I’ve set up countless new corporations and LLCs over the years, there’s always that pesky “little” formative question of whether or not the owners should make the S corporation election (LLCs can make S corporation elections, too). When I instruct the client to get an accountant (particularly startups) to make that decision, there is often some pushback by inertia, but I insist, which is one of the reasons I’ll suggest that my office has sustained in business for…35 years without professional liability. An S corporation election has operational implications that the attorney can manage in the deal documents (bylaws, operating agreement), but the decision itself is often a complex personal tax issue that is combined with attributional issues, such as payroll and fringe benefit issues.
The right tool for the right job. The tax professional has that tax code right there on the desk and has read it countless times. The S corporation election is a tax election and its source is found in the tax code and regulations.
If the source of the question or the answer is found in the tax code and regulations, then we pretty much have a bright line of whether the issue is a proper accountancy issue pursuant to the professional license. If an attorney gives advice sourced to the tax code without an accountancy license, then the attorney is in the danger zone. Inversely, if an accountant gives advice regarding anything not sourced to the tax code without a license to practice law, then the accountant is in the danger zone. Thus, the hybrid animal called the “tax attorney” who asserts competency or licensure as both attorney and accountant, but this is not the general rule, but rather the specialty exception.
But here’s the interesting thing. Ultimately, only a licensed lawyer (or judicial court of attorneys) can properly opine as to the legal scope of where the respective legal and accountancy lanes begin and end. An accountant is trained in tax law, money and tax law decisions, not criminal law, branding law, insurance law, bylaw and operating agreement issues, corporate deal structures, civil liability, enforcement, and interpreting the plethora of general laws applicable to a business rollout, or the general case law that interprets a plethora of contexts.
What is the criminal illegal practice of law? Only an attorney ultimately knows. Ultimately an accountant cannot opine on the metes and bounds of criminal conspiracies of the multiple partners or the criminal practice of law without a license.
Because sometimes accountants are intimately familiar with client business operations, and because sometimes accountants are a lower cost resource, and because sometimes accountants become friends with clients, and because sometimes accountants are revenue-centric and focused, there can be a natural tendency for accountants to assume the role of lawyers, like forming corporations and LLCs, reviewing contracts, fielding disputes, making trademark decisions, assisting in unemployment compensation issues, etc. Indeed, accountants are smart people, but it is the license that grants the permission.
As a matter of law, accountants may not provide legal advice to clients. In answering law-related questions in connection with the practice of ordinary work in the keeping of books and records, preparing tax returns, and advising with respect to such matters, an accountant may apply incidental legal knowledge. However, an accountant is criminally guilty of practicing law without a license, where the accountant undertakes to give legal advice and answer legal questions completely disconnected with such ordinary work in keeping and auditing books and preparing tax returns. See, e.g., Emden v. Martin Automatic Fishing Reel Co., 10 A.D.2d 603 (N.Y. App. Div. 4th Dep’t 1960)
It is an accountant’s duty to leave direct legal questions to a lawyer, such as when faced with interpretation or application of tax statutes, administrative regulations and rulings, court decisions, or general law. See, e.g., Agran v. Shapiro, 127 Cal. App. 2d Supp. 807 (Cal. App. Dep’t Super. Ct. 1954) Accountants are not authorized to engage in the business of giving legal advice based on their knowledge of the subject, claiming that tax law is a specialized area of competence. See, e.g., In re Roel, 3 N.Y.2d 224 (N.Y. 1957)
In Pennsylvania, it is illegal for any person, including a paralegal or legal assistant, to practice law or hold themselves out to the public as being entitled to practice law without being an attorney at law. 15 Pa.C.S. Ch. 291. Doing so is a crime.
Yes, this issue of practicing law without a license is industry horizontal, in that it can also be triggered by real estate agents and consultants who draft escrow language, modify terms and conditions, and implicate telling a person what words mean in the context of legal consequences. Dare I say it, but it might be that some professionals do not want to involve attorneys into a deal negotiation, because attorneys may raise issues that put the deal at risk for which the professional would otherwise earn a commission if it consummates. The Pennsylvania Bar Association has an excellent resource, Manual on the Unauthorized Practice of Law. See, e.g., id. at p.48.
And, yes, 35 years of practice provides me with enough experience to share a few representative “war stories.” Here goes…
Probably like you, I’ve heard the process of incorporating being called, “just a simple filling out and filing a simple form.” This flawed advice is common to many industries. Thus, my quipping retort is that “brain surgery is just a simple sawing and a cutting.” Many things, law, accountancy, cooking, brain surgery, are simple in the most basic act, but the precise question is whether a professional undertakes professional responsibility that any higher competency is not required. Perhaps not why you checked this box, but why you did not check the other box, or why you did not attach some override or optional language that is available to protect interests. That is, not only why you did what you did, but why you did not do what you didn’t do. Some might say it reductively that the required professional wisdom is not that the operation will succeed, but rather that the patient will not die.
Once a technology client was referred to me after the client had been in business for about 5 years and then having about 30 full-time employees. The company had a fantastic name. Accordingly, one of the first questions I asked was whether the brand name was federally protected with a federal trademark registration. The president’s response was, “Our accountant formed the corporation and told us that the name was protected by the incorporation.” This is potentially catastrophic legal advice from the accountant. [1, 2, 3, 4, 5, 6, 7]
In my CPE handout materials to accountants, I call this error, “The No. 1 Error by Accountants.” As a general rule, filing an incorporation or LLC only preserves formalistic technical name distinction in that state, not substantive federal trademark rights; that is, the state will not file another entity with exactly the same name generally for its own internal control purposes. In the referenced case, my client endured significant added cost, because, during the 5-year reliance delay, someone else had filed for the federal trademark first, even though my client had superior substantive rights. We ultimately secured the federal registration, and the accountant got lucky from a lawsuit that I was waiting to see if I should file. And, if I’ve said it once, I’ve said it a thousand times, “Luck is bad strategy.”
Indeed, think about it. The first and perhaps most important question on the corporation or LLC form is about the proposed name of the entity. An accountant’s license does not provide professional competency on that very first question. The choice of name cannot be separated from the trademark implications (or a lot of other legal decisions). Simply stated, the accountant is professionally incompetent to address the legal implications of a name choice in light of federal and state branding legal issues, and I will suggest that an accountant trying to disclaim the legal obligation is a disservice to the client and a self-interested breach of the larger professional obligation.
Let’s take another example “war story.” Once a client was referred to me in the context of a dispute between owners. Litigation ensued. The accountant formed the corporation pursuant to all the corporation (not tax) statutes of Commonwealth of Pennsylvania. The accountant advised to form a corporation and not a LLC or other type of entity. The choice of entity question does have one attribute in the form of a tax differential question, but there are a lot of legal implications to forming a company that are not tax related, but rather legally operational and legally strategic, potentially catastrophic.
We subpoenaed the accountant for a deposition, and the accountant showed up without legal counsel even after notice of his right to representation at the deposition. Halfway through the deposition, the accountant needed to call an attorney for emergency attendance after lunch. The reason was because I was asking the accountant the basis for his decisions in selecting the corporation structure, why he chose or did not choose to implement certain provisions of the corporation statute, how he advised the client on bylaws, annual meetings, director liability override options, fiduciary duties, voting deadlock dispute options, chancery court options in different jurisdictions, liability implications, and all the other appurtenances of the corporation form. All of a sudden, and abruptly and abrasively, the accountant saw his risk and liability.
Another similar “war story” was with an accountant who handled multiple family companies, moving money around for “tax reasons.” The family ended up in a dispute and litigation that lasted about 5 years. We subpoenaed the accountant to testify to the judge in open court at the evidentiary injunction hearing to “explain” his actions. The accountant had to make a claim on his insurance carrier, who attended the preliminary injunction hearing on his behalf (presumably under a reservation of rights letter), because a lot of what the accountant did was claimed as a “family favor” (and way beyond what anyone in the family understood or condoned) and certainly less than “by the book,” interposing and implicating himself into all sorts of legal advice and operational business decisions beyond the scope of accountancy.
I’ve even been called in to help clients in unemployment compensation hearings that the accountant handled at the onset until it became “too adversarial.” Doing a client’s payroll is not the same thing as legally advising on unemployment claims. Unemployment compensation hearings are way out of an accountant’s lane and the case got far messier because the accountant missed certain deadlines and opportunities.
In fact, the impetus for this article as to the now of it, after all these years, is because I’ve recently gotten a fair share of clients who have accountants who are claiming legal competency to interpret and to file the Corporate Transparency Act disclosure, [8] which, sourcing government agencies aside, is not a tax law or accountancy-based filing per se, but rather in the nature of a new unsettled federal criminal law corporate disclosure filing that is grounded in substantive legal interpretive opinions of corporate ownership, control and operations. The new federal CTA law has some interesting interpretive legal twists and turns, as to inclusions and exceptions, and I’ll suggest that accountants are out of their lane in doing it, because the legal conclusions to do so are sourced from legal advisory interpretive conclusions that cannot be ultimately substantively defended. That is, the accountants are not making a surrogate tax compilation filing by extrinsically-created evidence, but rather rendering a legal opinion in a criminal context, by making an implicit operational criminal legal advisory interpretative filing as to who is proper to disclose by substantive operational legal assessment in a criminal law context. Moreover, and potentially catastrophically, for accountants who are not also attorneys, they do not have the same attorney-client privilege, and the criminal admissive communications and thought processes regarding this criminal statute by the client and the accountant, and the admissions made therein and thereby, may be discoverable by legal authorities or in civil litigation, with both the accountant and the client being conspiratorially implicated for improper evasions or non-disclosure. [*8]
Again, I love accountants. But, from a broader perspective, I will suggest the following, as a word to the wise, by natural tendencies that I have observed over many years. When the economic context provides less work for more people, competition occurs by inclinations to survive and to prosper. But accountants should be prudent and vigilant and disciplined, because attorneys are ultimately the interpreter and arbiter of permissibility.
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[1] Protecting Your Brand / Trademark with Automated Monitoring [#GRZ_8]
[2] Branding: 8 Common Questions About Trademarks! [#GRZ_9]
[3] The Federal Trademark ® Process-How It Works! [#GRZ_10]
[4] The USPTO Proof of Use Trademark Audit – There’s a New Sheriff in Town. [#GRZ_96]
[6] Mickey and Minnie; Or Distinguishing Trademarks ®™ and Copyrights © [Part 1] [#GRZ_166]
[7] Mickey and Minnie; Or Distinguishing Trademarks ®™ and Copyrights © [Part II] [#GRZ_167]
“Malum consilium fortuna est.” (“Luck is bad strategy.”) ~ grz
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* Gregg Zegarelli, Esq., earned both his Bachelor of Arts Degree and his Juris Doctorate from Duquesne University, Pittsburgh, Pennsylvania. His dual major areas of study were History from the College of Liberal Arts and Accounting from the Business School (qualified to sit for the CPA examination), with dual minors in Philosophy and Political Science. He has enjoyed Adjunct Professorships in the Duquesne University Graduate Leadership Master Degree Program (The Leader as Entrepreneur; Developing Leadership Character Through Adversity) and the University of Pittsburgh Law School (The Anatomy of a Deal). He is admitted to various courts throughout the United States of America.
Gregg Zegarelli, Esq., is Managing Shareholder of Technology & Entrepreneurial Ventures Law Group, PC. Gregg is nationally rated as “superb” and has more than 35 years of experience working with entrepreneurs and companies of all sizes, including startups, INC. 500, and publicly traded companies. He is author of One: The Unified Gospel of Jesus, and The Business of Aesop™ article series, and co-author with his father, Arnold Zegarelli, of The Essential Aesop: For Business, Managers, Writers and Professional Speakers. Gregg is a frequent lecturer, speaker and faculty for a variety of educational and other institutions.
© 2024 Gregg Zegarelli, Esq. Gregg can be contacted through LinkedIn.
#GreggZegarelli #PracticingLaw #CriminalLicensure #Crimes #AccountantCrimes #Accountants #Accountancy #CTA #CorporateTransparencyAct #Scorporation #Trademarks #NameReservation #Incorporations #Zegarelli #GRZ_202
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