Should the government rely on private law firms to perform its legal work? Privatization of government litigation has occurred for years, but not without controversy. Law360’s Expert Analysis special series explores the issue from the points of view of a former IRS counsel, a former attorney general and a former U.S. Department of Justice tax litigator.
The IRS retainer of Los Angeles litigating powerhouse Quinn Emanuel Urquhart & Sullivan LLP to help develop a multibillion dollar transfer pricing case against Microsoft Corp. has generated enormous controversy. Microsoft has litigated the propriety of Quinn Emanuel’s involvement in federal district court. Congress has harshly questioned the IRS’ decision to hire a private law firm to participate in the conduct of the Microsoft tax audit. And, the tax bar has critically discussed whether the Quinn Emanuel retainer will serve as precedent for future retainers of private firms to participate in audits and investigations. While the Microsoft audit will continue for some time, the dispute over the Quinn Emanuel retainer has raised several important questions. First, is retention of a private law firm for the audit and litigation of tax disputes good litigation strategy? Second, is retention of a private law firm for the audit and litigation of tax disputes good public policy? Third, are we likely to see similar retainers of private law firms by the IRS in future cases? This commentary explains why the Quinn Emanuel retainer is poor litigation strategy, contrary to good public policy, and a misadventure which (hopefully) will not be repeated.
Poor Litigation Strategy. Evaluation of the Quinn Emanuel retainer as a matter of litigation strategy is complicated by uncertainty regarding the role that Quinn Emanuel will ultimately perform in the dispute. During the district court litigation, the IRS asserted that Quinn Emanuel would serve primarily as a supplemental resource to the audit team and give occasional briefings to senior IRS managers under a $2.1 million consulting contract, which provided for payment of hourly rates of up to $1,100. Microsoft, however, pointed to provisions of the contract that contemplated an additional $6.5 million retainer for the pretrial phase of the dispute, as well as evidence that the IRS intended to hire the Quinn Emanuel lawyers as “special government employees” for the actual trial of the dispute. Given that the Microsoft audit has continued to develop slowly, we cannot fully ascertain what role Quinn Emanuel will ultimately perform.
Regardless, in selecting potential outside counsel, the IRS should have been looking for a firm with extensive knowledge of tax law and transfer pricing, substantial experience with Tax Court practice and procedure, and a track record of working cooperatively with the various constituencies within the IRS. Presumably, many of the most qualified firms would have been unavailable due to conflict issues. But, that does not make Quinn Emanuel a good choice. Quinn Emanuel is an excellent firm, and many of its fine trial lawyers operate at the highest level, but Quinn Emanuel has essentially no experience with substantive tax law or transfer pricing, no experience in the Tax Court, and no record of working with IRS employees. In many ways, hiring Quinn Emanuel as counsel in a complex transfer pricing case is like choosing a neurosurgeon to diagnose an exotic new viral infection — a skilled professional ill-suited to the task at hand.
Successful litigation depends upon presentation of a coherent, unified position to the courts. The IRS, however, often struggles in complex litigation to make a coherent, unified presentation because of the multiple constituencies within the Service that participate in developing the Service’s position. In a case like Microsoft, the exam team, large business and international (LB&I) division counsel, LB&I management, senior trial attorneys and other chief counsel litigators, chief counsel subject matter experts, and all of their superiors will surely have opinions and suggestions regarding the litigation. Balancing the interests of these competing constituencies is always a challenge and, during the Microsoft audit, that balancing has led to situations where IRS revenue agents trained as accountants conducted interviews of important Microsoft witnesses while $1,000/hour litigators who are expert in examining witnesses sat by idly in the same room. Here, adding Quinn Emanuel to the mix, particularly to the extent that it develops its own line of reporting to senior IRS management, will only exacerbate this management challenge.
Finally, giant cases like Microsoft are a poor place to experiment with new ways of conducting and managing litigation. The stakes are high and highly skilled opponents are well positioned to take advantage of the inevitable missteps that occur in any new and experimental management approach. If the IRS wanted to experiment with hiring outside counsel, it would have been better-advised to start with medium-sized cases and refine the process before it tried out the approach in its most important litigation.
Poor public policy, Hiring Quinn Emanuel sacrifices one of the important advantages of the IRS in any tax dispute — the courts’ presumption that the position advocated by the IRS reflects the agency’s considered, unbiased view of good public policy. That advantage is reinforced when the IRS’ positions are presented by lawyers actually employed by the Service. Those same IRS lawyers regularly appear before the Tax Court and have developed their own storehouse of credibility with individual judges — another important advantage. Representation of the IRS by private firms like Quinn Emanuel will inevitably erode these extraordinary advantages.
Differences in the ethical obligations and economic interests of government lawyers and lawyers in private firms also make government lawyers a more appropriate representative of the IRS. During my years of litigating for the U.S. Department of Justice’s Tax Division, I and other government tax lawyers understood that our primary ethical obligation was to ensure that justice was done, even if that meant the government should concede an individual case. In contrast, private law firm lawyers operate under a different set of rules and are trained to zealously advocate for their client’s interests. Similarly, while government lawyers typically have no personal economic interest in the outcome of a case, Quinn Emanuel surely knows that a victory in the Microsoft litigation is in the firm’s future economic interest. Courts, taxpayers, legislators and the public will recognize these differences and the credibility of the IRS will be further compromised.
In addition, retention of Quinn Emanuel or any other private law firm will further damage the reputation of the IRS as a careful steward of the appropriations it receives. The IRS faces intense budgetary pressures and is constantly seeking additional funding from Congress. Those efforts will not be helped when Congress learns that the IRS seems willing to bypass the hundreds of lawyers it employs to spend nearly $10 million to hire outside counsel at $1,100 per hour. All that at a time when the agency complains that it lacks funding to hire enough staff to answer phone calls during tax return season.
Most damning are statements attributed to high-ranking IRS officials asserting that the Service needed to hire Quinn Emanuel because its own lawyers were incapable of adequately representing the government in the Microsoft litigation. In fact, the Service’s senior trial attorneys and Justice Department Tax Division trial lawyers have always tried the largest tax cases, compiling an enviable record of success in complex, high-stakes tax litigation. I have personally worked with many of these lawyers during my 25 years of tax litigation practice and have found that their skills compare favorably with just about anyone. Not only are they paid only a small fraction of the amount the IRS plans to pay Quinn Emanuel, but they are also skilled in both substantive tax law and trial techniques, know the Tax Court and its judges, and have lived the Tax Court’s unique procedural rules.
The IRS’ leaders have insulted these talented and dedicated lawyers, while sending a damaging message to the courts, taxpayers and the general public. By retaining outside counsel, the IRS is effectively creating a two-class system — important matters are handled by outsiders, while other matters are handled by the “B” team of career government employees. That is hardly a helpful message.
Finally, this is not a situation like the occasional retainer of a private law firm by a state and local governments confronted with a once-in-a-lifetime case, such as systemic mortgage fraud, which involves high stakes and an esoteric area of law. A local government with an especially limited legal staff of its own may have no other choice than to turn to private counsel. Even in those unique circumstances, advocates of government support for private counsel litigating class actions endorsed by governments recognize that these retainers raise concerns regarding extending the imprimatur of the government to private counsel. Here, the IRS is uniquely knowledgeable regarding matters of tax law and has a large staff of lawyers whose full-time job is to litigate tax cases in the Tax Court. It has no compelling need to retain private counsel. That explains why the IRS had never before entered into an arrangement like the Quinn Emanuel retainer. Even outside the tax arena, there is almost no precedent for other components of the federal government turning to private counsel to vindicate the interests of the government. Even if the private counsel might represent the government’s interests with marginally more skill, the risks to the presumed integrity of the government as litigant are too great to justify the extraordinary step of hiring private counsel to represent the government.
The future. Viewed in retrospect, the IRS’ retainer of Quinn Emanuel seems to have accomplished little. Eighteen months after Quinn Emanuel was retained, the IRS has made little progress in completing the Microsoft audit; the witness interviews that first raised the questions about Quinn Emanuel’s involvement are still incomplete. The IRS and the Justice Department have expended their scarce resources in fighting a battle about Quinn Emanuel, which can, at most, indirectly influence the outcome of that audit. Other transfer pricing cases have been docketed in Tax Court and are progressing toward decision on the merits, while the Microsoft audit remains a long way from decision. If the IRS retained Quinn Emanuel with hopes of buttressing its team for litigating its preferred vehicle for establishing favorable precedent in the transfer pricing arena, it appears unlikely to ever achieve that goal.
Fortunately, more recent events suggest that the Quinn Emanuel experiment will not be repeated. Sen. Orrin Hatch, R-Utah, of the finance committee has written to the commissioner expressing his opposition to the Quinn Emanuel experiment and requesting a halt to the practice of hiring private counsel for audits. Even U.S. District Judge Ricardo Martinez, while allowing Quinn Emanuel to participate in the Microsoft audit, stated, “The court is troubled by Quinn Emanuel’s level of involvement in this audit.” More recently, in a March 2016 speech, IRS Chief Counsel William Wilkins said that “we do not have plans for additional hiring of outside law firms at this time.” Hopefully, these statements indicate that the IRS will not be turning to the ill-advised practice of hiring private counsel like Quinn Emanuel in the future.
—By Stuart J. Bassin, The Bassin Law Firm PLLC .
Stu Bassin is a veteran tax litigator with experience in complex tax litigation. During a 20-year stint with the U.S. Department of Justice’s Tax Division, he served as lead counsel in a series of major cases involving complex factual and legal issues. He has written and spoken extensively on matters concerning the operation of the tax system. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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