There is considerable disagreement between CPAs and attorneys as to exactly what CPAs can do in the area of advice and what constitutes the practice of law – especially since “practice of law” is a nebulous term without clear definition. Most of the disagreement often seems to come to a boil in the area of tax practice. The situation hasn’t been helped or made any clearer now that many big firms employ lawyers who prepare tax returns. There seems to be a growing concern among lawyers that CPAs are straying outside their territory into the field of law. This column looks at some past legal cases and provides suggestions for what types of work CPAs can do.
One of the oldest and most widely recognized cases of unauthorized tax practice is the N.Y. County Lawyers Association v. Bercu
case. Bernard Bercu was a CPA working in New York City over 50 years ago. He was approached for advice as to whether a corporation’s prior-year accrued taxes could be deducted on the current-year tax return. The point of the case is not Bercu’s advice, but rather those who approached him were not clients and Bercu had not prepared their tax returns. The outcome and opinion in this case in part stated: “He [Bercu] had nothing to do with the company’s books or its tax returns. The only question was what view the tax authorities, and ultimately the courts, would take as to the years in which the payments of the city’s tax claims would be deductible for federal tax purposes.”
The court held that accountants can decide a question of law that is “incidental” to the preparation of tax returns, but they cannot address themselves to a question of law alone. So, if Bercu had the company as his tax client, and offered the same advice, he would not have been held to be in the practice of law. The court also stated that many or most questions that may arise in the preparation of tax returns may be answered by an accountant handling such work. But if an outside accountant, besides the regular accountant preparing the income tax return, gives advice requiring legal research, then that consultant must be a lawyer. In short, legal advice was sought and given by Bercu on a question of law.
This brings up the question of what is considered “incidental” when it comes to preparing tax returns. Merriam-Webster defines incidental as “occurring merely by chance or without intention or calculation.” Based on this definition, when preparing a tax return, CPAs may render any interpretation of tax law related to the return without “practicing law.”
In 1991, there was an interesting case in South Carolina (Unauthorized Practice of Law Rules Proposed by the South Carolina Bar
). The South Carolina bar submitted to the South Carolina Supreme Court a list of proposed rules that attempted to define the “practice of law.” The court reasoned that “it is neither practicable nor wise to attempt a comprehensive definition by way of a set of rules.” In addition, the court took the opportunity to clarify certain practices that do not constitute the practice of law. It held that “CPAs do not engage in the unauthorized practice of law when they render professional assistance … that is within their professional expertise and qualifications.”
The South Carolina Supreme Court decision illustrates what many courts have held: a strict definition of the practice of law does not promote the public interest. But many courts use a subjective two-pronged test to reach the same conclusion: a test based on the nature of services rendered (oftentimes referring to the Bercu
case) and another test based on the difficulty of the service rendered.
The problem with the nature-of-services test is that one CPA can give legal advice in connection with a tax return while preparing the return, and another can give the same advice but does prepare the return. The second defendant would have engaged in the practice of law, while the first would not have – a conflicting result. So, a difficulty-of-services test was added. It was defined partially by Clifford W. Gardner and Others v. James L. Conway
. Conway was a public accountant and internal revenue employee. He prepared tax returns and gave advice to a taxpayer as to whether the taxpayer was married by common law to a woman to whom he was not ceremonially married. Conway held that his advice was incidental to the preparation of the tax return. The court recognized the blurred line when determining the practice of law, and said it was more of a matter of were the questions at issue unclear to the extent they needed the application of a trained legal mind.
Another tax return area of disagreement between the professions is the preparation of tax returns in connection with a decedent’s estate. In Pennsylvania, Opinion 97-102 is related to the preparation of Pennsylvania inheritance tax returns and filing them with the Register of Wills and Clerks of the Orphans’ Court Association of Pennsylvania. The CPA Law in Pennsylvania, as amended in 1966, defines the term “public accounting” as “offering to perform or performing for a client or potential client: (1) attest activity, (2) other professional services involving the use of accounting skills, including, but not limited to, management advisory or consulting services, business valuation, financial planning, preparation of tax returns, or furnishing of advice on tax matters by a person holding out as a certified public accountant, public accountant, or firm.” The Supreme Court of Pennsylvania has held repeatedly that the boundaries of the “practice of law” are without precise definition.
So what’s a CPA to do? Perhaps the only rule of thumb is for the CPA to be judicious. As there is no singular definition of what constitutes the practice of law regarding the role of the CPA, caution must be exercised.
Always keep in mind the boundaries of your specialized knowledge and skill. Context is crucial, so make sure you see the whole picture. Above all, if you have doubts, it’s probably best to work with an attorney to avoid any costly mistakes and to fulfill your due diligence on behalf of your clients.
Rodger J. Krause, CPA, is owner and proprietor of Rodger Krause CPA Inc. in Wyomissing and a member of the
Pennsylvania CPA Journal Editorial Board. He can be reached at firstname.lastname@example.org.