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Allen Liebnick
Allen Liebnick

The Defense of Reliance on Professional Advice

What happens when your clients do something illegal and blame it on taking your advice?

October 8, 2009
by Allen Liebnick, CPA, CFF

Many years ago, when I worked for one of the “Big Eight” accounting firms, I worked for a tax partner who was a walking encyclopedia when it came to taxes. If you asked Charlie a question he would not only tell you its case history, the IRS Code, but the section number right down to the little (i) and he would always say, “I think that’s right but don’t quote me.” While Charlie was always right, he still left the door open just in case.

As professionals we are all asked for advice on a regular basis. Whether it is a client or an employer, we as professionals are expected to have the knowledge to answer their questions regarding their business and/or personal finances. But what happens when they do something illegal and blame it on the professional advice they received? It has become common place to read or hear about a fraud, embezzlement or a Ponzi scheme in which the accused’s defense is “I’m not to blame.” “I was just following the advice of my accountant/lawyer/some other professional whom I hired to give me advice.” As maddening as it is for a professional retained by such a client to hear that, there is an actual affirmative defense that is recognized in criminal law under which a defendant can disprove the intention component of the charged crime if he can prove that he relied upon the advice of a professional that he retained.

How Do Plaintiffs Do That?

Seymour Roberts, Jr., a partner at the Dallas, Texas-based law firm of Neligan Foley, LLP provided a basic primer to that affirmative defense and examples of some common scenarios in which defendants have tried to invoke it.

To prove the defense of the reliance on professional advice, a defendant is required to produce some evidence showing that:

  1. The advice was sought and received before taking action;
  2. The defendant in good faith sought the advice of a professional whom the defendant considered competent;
  3. The purpose of obtaining the advice was to determine the lawfulness of future conduct;
  4. A full and accurate report was made to the professional of all material facts which the defendant knew; and
  5. The defendant acted strictly in accordance with the advice of the professional who had been given a full report.

Other courts have consolidated these five elements into two:

  1. Full disclosure of all pertinent facts to an expert; and
  2. Good faith reliance on the expert’s advice.

Roberts explained that from a legal standpoint, it is constitutionally allowable to impose on a defendant the burden of producing some evidence to establish an affirmative defense. It is also understood that reliance on professional advice is an affirmative defense that a defendant must establish. Nevertheless, this does not shift the ultimate burden of proof, which stays with the prosecution. The law puts no burden on a defendant to prove an affirmative defense beyond a reasonable doubt. The defendant is only supposed to produce more than an iota of evidence regarding an affirmative defense, while the burden remains on the government to prove beyond a reasonable doubt every element of the crime(s) charged and that the affirmative defense has not been established.

As an example of requesting advice from a professional versus giving directions to the professional, Roberts cited the case of United States v. O’Connor, 158 F.Supp.2d 697, 728 (E.D.Va. 2001) (O’Connor); Liss v. United States, 915 F.2d 287, 291 (7th Cir. 1990) (Liss). The defendants were charged with immigration fraud, filing false income tax returns, failure to file income tax returns, bankruptcy fraud and conspiracy to commit immigration fraud, tax fraud, wire fraud and money laundering. In connection with the tax and bankruptcy aspects of their case, the defendants claimed that they were relying on the tax and accounting advice of their accountant. But the record before the court established that all of the actions undertaken by the accountant in connection with the defendants’ financial and tax records were done at the specific request of the defendants. It was clear to the court that the accountant just followed the defendants’ instructions at all times. Despite their contentions to the contrary, the defendants failed to produce any credible evidence:

  1. That they sought or received the competent professional advice of their accountant,
  2. That they relied on that advice or
  3. That they provided the accountant with complete disclosure regarding their true financial situation.

In contravention to the position that they took, the evidence showed that the accountant:

  1. Acted at all times at the express direction of the defendants,
  2. Made no independent professional decisions on behalf of the defendants and
  3. Did not seek to verify or audit any of the financial information provided to the accountant by the defendants.

Given this state of affairs, the court ruled that the defendants’ attempt to rely on the alleged professional advice of the accountant in connection with the tax and bankruptcy portions of their case failed. (Of course this case makes us wonder just how “professional” the accountant was in preparing returns/statements based solely on information furnished him. But, alas we have also seen this in recent times).

Roberts gave another case in which the question was whether merely having contact with his professional constituted relying on the professional for advice. In, United States v. Masat, 948 F.2d 923, 930 (5th Cir. 1992) (Masat), citing United States v. Meyer, 808 F.2d 1304, 1306 (8th Cir. 1987); United States v. Stone, 431 F.2d 1286, 1288-89 (5th Cir. 1970), cert. denied, 401 U.S. 912 (1971); United States v. Conforte, 624 F.2d 869, 877 (9th Cir. 1980), cert. denied, 449 U.S. 1012 (1980); O’Connor, 158 F.Supp. 2d at 728, citing United States v. Butler, 211 F.3d 826, 833 (4th Cir. 2000), the defendant was convicted on tax evasion charges. The defendant claimed to be relying upon the advice of his professional, but he did not clearly articulate how he relied on the professional. He was unable to provide documents, such as letters and legal papers, which indicated that reliance. It appeared that over a period of years, the defendant had contacted this professional. This contact, however, did not indicate reliance on the advice of the professional. Contact with a professional is distinct and separate from relying upon a professional’s advice.

As to the issue of whether or not a full and accurate report was made to the professional of all material facts that the defendant knew, was found in another case that Roberts cited. In the case of United States v. One 1988 Prevost Liberty Motor Home, 952 F.Supp. at 1213 (Prevost), citing United States v. Carr, 740 F.2d 339, 347 (5th Cir. 1984) (Carr), cert. denied, 471 U.S. 1004 (1985), the U.S. brought a civil forfeiture action against a motor-home purchased with funds from the sale of assets from a discharged chapter seven debtor and was concealed from the bankruptcy court and the trustee. The corporation controlled by the debtor, who was the record owner of the motor-home, contested the forfeiture and claimed ownership and that they were advised by their attorney not to disclose their ownership. The court found that to the extent that advice was given to the debtor, to not disclose certain interests, it was given on partial information. The court ruled that the weight of the evidence showed that the debtor did not make a full and complete disclosure to his attorney of his assets, liabilities, employment affiliations and access to corporate bank accounts. When the client makes only a partial or incomplete disclosure of the extent of his involvement or association with transactions or assets, the client cannot later rely on the advice of a professional.

Conclusion

From a practical standpoint, it is important that each of the factors of this affirmative defense is met. Roberts points out that if you end up as a defendant’s professional and that defendant attempts to rely on affirmative defense by citing you as the one who “told him to do it,” you need to know what each of those factors are. Before giving advice, be sure you have all the information as to what that advice is for and how it is intended to be used. And maybe, use Charlie’s caveat, “don’t quote me.”

Who lied to me about his case,
And said we’d have an easy race,
And did it all with solemn face?
It was my client.

(Shrager, David S. and Frost, Elizabeth, The Quotable Lawyer, Facts on File Publications (1986), p. 49, citing Braude, Jacob M., Lifetime Speaker’s Encyclopedia (1962)).

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Allen M. Liebnick, CPA CFF, is president of Overpaid Payables Recovery, Inc. A former associate professor, Liebnick has been providing accounts payable, sales tax and telecommunications post audit recovery services for over 15 years. He serves clients in the U.S., Canada and Mexico. He is a member of the New York State Society of Certified Public Accountants as well as Texas Society of Certified Public Accountants. Liebnick thanks Seymour Roberts, Jr. for participating in this article. Corporate Finance Insider readers who have questions for Roberts can contact him directly at sroberts@neliganlaw.com. Tell him Allen sent you.