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A prominent Washington tax lawyer is under attack for advice he gave to a high-profile hedge fund whose implosion in 1998 shook global markets and federal regulators. Mark Kuller, a partner with D.C.’s McKee Nelson, has been sharply criticized by a Connecticut federal judge for advice he provided the fund as well as for the testimony he offered at a 2003 trial involving the hedge fund, Long-Term Capital Management, and the Internal Revenue Service. And the implications could reach far beyond Kuller. McKee Nelson, a firm specializing in sophisticated tax advice that served as counsel to Long-Term Capital in a lawsuit against the IRS over tax deductions, could also be on the hook, say legal malpractice experts. “It’s a very good bet that a claim will be made based on the nature of the tax advice given — whether or not the tax advice was actually good,” says Kevin Rosen, a Los Angeles lawyer who heads Gibson, Dunn & Crutcher’s legal malpractice defense group. The Aug. 27 decision out of the U.S. District Court of Connecticut found that Long-Term Capital improperly took $106 million in deductions in 1997 to avoid paying $40 million in taxes. In her opinion, Judge Janet Bond Arterton wrote that “important aspects” of Kuller’s trial testimony were “unsupported and lacked credibility.” On Aug. 31, Miller & Chevalier, which also has a well-known tax practice, filed a motion to appear as counsel to Long-Term Capital in the case and will likely handle the hedge fund’s appeal of Arterton’s decision to the U.S. Court of Appeals for the 2nd Circuit. Kuller and McKee Nelson name partner William McKee, who also worked on Long-Term Capital, declined comment. A McKee Nelson spokesman says that it would be “inappropriate” to comment on a pending case. Zuckerman Spaeder, a D.C. firm known for its white collar defense work and which has been ongoing legal counsel to McKee Nelson and had advised the firm during its creation, also declined comment. Graeme Bush, chairman of Zuckerman, would not comment on whether the firm was assisting McKee Nelson in preparing for litigation regarding McKee Nelson’s work or any of its partners’ work for Long-Term Capital. Kuller was an attorney in King & Spalding’s D.C. office when he advised Long-Term Capital between 1996 and early 1999. In November 1999, he joined McKee Nelson, founded by fellow King & Spalding partners William Nelson and William McKee earlier that month. While at King & Spalding, McKee also advised Long-Term Capital on the transactions under scrutiny in the case, according to the judge’s opinion. However, Arterton does not focus on McKee’s conduct. King & Spalding did not return a call for comment. The opinion in the case has alarmed some members of the tax bar, who say the advice Kuller gave Long-Term Capital wasn’t uncommonly risky during the economic giddiness of the late-1990s. “The opinion is unusual in the way it calls Kuller on the carpet,” says Felix Laughlin, D.C.-based co-chair of Dewey Ballantine’s tax department. LETTER OF THE LAW Lawyers are often asked by clients to write legal opinions that suggest a certain tax shelter is likely to satisfy the IRS and the courts if challenged. Clients can pay hundreds of thousands of dollars for such opinions. In her decision, Judge Arterton not only attacked the work that Kuller did in issuing that kind of advice for Greenwich, Conn.-based Long-Term Capital, but also focused on the relationship between himself, his current and former firms, and the hedge fund. In 1999, while both Kuller and McKee were at King & Spalding, the pair advised the fund in claiming capital losses. The claims were part of a complex set of transactions that Judge Arterton said lacked economic substance — one of the key components of an abusive tax shelter, which is a financial transaction that is undertaken for the sole reason of exploiting tax advantages, rather than generating income. If the highest potential tax penalties are assessed, Long-Term Capital could end up paying about $56 million to the IRS, the highest total civil penalty the agency has ever obtained, according to Arterton’s opinion. A celebrated hedge fund, Long-Term Capital collapsed in 1998, but was bailed out by the Federal Reserve and a consortium of private banks. The fund filed suit against the IRS in 2001 to recover more than $40 million in tax deductions, arguing that it had suffered economic losses. Kuller, 52, a 1978 graduate of the University of California at Los Angeles School of Law, is known by colleagues in the tax bar as an able, bright attorney. He worked for the IRS for two years in the 1980s. So it came as a surprise to some of those colleagues to see a portion of Judge Arterton’s opinion labeled: “Kuller’s Credibility.” Kuller was, in some respects, in an unusual position in the Long-Term Capital litigation. Having prepared legal opinions for the fund, he was called as a witness. However, his firm, McKee Nelson, was also trial counsel. It was a relationship that drew Arterton’s attention. In her opinion, Arterton wrote that Kuller had an “obvious stake” in Long-Term Capital prevailing in the case, since he represented the fund during the IRS audit from which the litigation stemmed, assisted Long-Term Capital in its suit against the IRS, and co-wrote the tax opinion for Long-Term Capital that was under scrutiny in the case. “The bottom-line issue is that the judge challenged the credibility of the individuals involved because of subsequent involvement in the audit and litigation,” says legal malpractice expert Rosen. The government’s lead trial lawyer in the case, Charles Hurley, now a partner at Mayer, Brown, Rowe & Maw in Washington, says that it can be difficult for law firms and their partners to juggle the dual responsibilities that arise when a lawyer serves as a witness in a case his firm is litigating. “It is hard for those firms to separate their role between counsel and witness, and my sense is that it’s not a great strategy, as evidenced in this case,” Hurley says. “It’s certainly cautionary.” Donald Alexander, a D.C. partner at Akin, Gump, Strauss, Hauer & Feld’s tax group and a former IRS commissioner, says that the relationship between Kuller, his firm, and Long-Term Capital prompts questions of professional judgment. “He’s basically testifying on his own work,” Alexander says. “I think it’s somewhat unusual for a member of the firm that is representing the taxpayer to appear as a witness.” Arterton addressed the issue more strongly, writing that Kuller’s testimony had the “distinct quality of advocacy . . . notwithstanding his protestations that he was ‘up here just to tell the truth as to what happened.’” She wrote that as a witness, Kuller responded very cooperatively to his own partners, as opposed to the way that he responded to questions from the government’s lawyers. “His belligerence in responding to the Government’s cross examination stood in marked contrast to his manner on direct examination by his law partner,” wrote Arterton, a 1995 Bill Clinton appointee. In several spots throughout the 196-page opinion, Arterton attacked Kuller’s truthfulness, going so far in some instances as to question whether certain client conversations Kuller claimed to have had in regards to the Long-Term Capital transactions even took place. SHIFTING CONCERNS The kind of work that Kuller did for Long-Term Capital, however, was common during the economic boom of the late 1990s, says Akin Gump’s Alexander. “A lot of people were giving a lot of opinions in those heady days,” Alexander says. “A lot of people thought some risks were worth taking and would write opinions to that effect.” Opinions for tax shelters are a lucrative business, and according to Arterton’s opinion, which cited Kuller’s testimony, they brought King & Spalding $500,000 per opinion. But when the government or the courts believe that a tax shelter isn’t valid — that it lacks a genuine economic purpose other than to save a company or an individual tax dollars — the lawyers who blessed the shelters can be called into question. Indeed, in its case against the IRS, Long-Term Capital contested the applicability of millions in tax penalties, principally by arguing that King & Spalding’s opinions, as well as those provided by Shearman & Sterling, whose lawyers also provided tax advice to Long-Term Capital on some of the transactions at issue in the case, gave the fund adequate reassurances that the shelters were aboveboard. Shearman & Sterling and New York partner John Sykes III were criticized by Judge Arterton in her opinion, but not as exhaustively or broadly as she criticized Kuller. Arterton dedicated four pages of her opinion to criticism of Sykes’ work for Long-Term Capital, while she used 14 pages to detail her objections to King & Spalding and Kuller’s work. No one from Shearman & Sterling, including Sykes, returned telephone calls seeking comment. HEIGHTENED AWARENESS Foolproof insurance against tax penalties is hard to come by. When the IRS assesses penalties, it takes into consideration how much effort the taxpayer made to ensure it assessed its own tax liability correctly. The IRS also considers how sophisticated the taxpayer is — and in the case of Long-Term Capital’s shareholders, which included Myron Scholes and Robert Merton, Nobel Prize winners in economics, the level of sophistication is presumably very high, making them less likely to be forgiven by the IRS for accepting imperfect advice from tax lawyers. Kevin Keyes, a partner in Fried, Frank, Harris, Shriver & Jacobson’s D.C. tax practice, says that awareness of the potential perils of corporate tax shelters has heightened over the last few years. “The environment clearly has changed,” Keyes says. “You would have to believe firms would think hard about this kind of work now.”

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