Can a lawyer buy a client's tax refund at a discount and split the profit with another client who fronts the money?

Plain-English summary

A lawyer who prepared income tax returns for many of his clients followed a practice of buying each client's refund at ninety percent of face value, with the refund check to be endorsed over to him when issued. Another client advanced the money and took sixty percent of the profit, while the lawyer kept the remaining forty percent as his fee. The committee was asked whether this was ethical and concluded that it was not.

The committee drew on a long-standing American Bar Association position that it was improper for an attorney to buy judgments, notes, and other choses in action for less than face value, treating such purchases as a violation of Canon 28's bar on stirring up strife and litigation, and as conduct beneath the dignity of the profession even if Canon 28 did not reach it. The committee added that the practice could be seen as violating Canon 10, which forbids a lawyer from purchasing any interest in the subject matter of litigation he is conducting, and the spirit of Canon 11, which requires a lawyer to refrain from any action by which, for personal gain, he takes advantage of the confidence reposed in him by his client. It noted the conduct could also be interpreted as violating Canons 34 and 35.

Weighing those considerations together, the committee held that it was improper for an attorney to engage in such practices and that the conduct was unethical.

Currency note

This opinion was issued in 1963 under the former Canons of Professional Ethics (in effect in Kentucky from 1946 to 1971) and predates both the 1990 adoption of the Rules of Professional Conduct (SCR 3.130) and the substantial 2009 revisions to those rules. Subsequent rule amendments and later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific point mentioned here.

Common questions

Q: Can a lawyer buy a client's tax refund at a discount?

A: Under this opinion, no. The committee found buying a client's income tax refund at ninety percent of face value improper, treating it as acquiring an interest at the client's expense and conduct beneath the dignity of the profession.

Q: Why did the committee object to the arrangement?

A: It read the practice against Canon 28 (stirring up litigation), Canon 10 (purchasing an interest in the subject of litigation the lawyer is conducting), and the spirit of Canon 11 (taking advantage, for personal gain, of the confidence the client reposes in the lawyer).

Q: Did it matter that a second client funded the purchase and took most of the profit?

A: The committee recited that arrangement as part of the facts and concluded the overall practice could also be interpreted as violating Canons 34 and 35; it held the conduct unethical as a whole.

Background and rules framework

The opinion applied several of the former Canons of Professional Ethics: Canon 10 (a lawyer's acquiring an interest in the subject of litigation he conducts), Canon 11 (using the client's confidence for personal gain), Canon 28 (stirring up strife and litigation), and Canons 34 and 35 (division of fees and the lawyer's relationship to the client's affairs). The modern analog is Model Rule 1.8, which governs business transactions with clients and a lawyer's acquisition of a proprietary interest in the client's claim, with Kentucky's counterpart at SCR 3.130(1.8).

Citations and references

Rules of Professional Conduct:

• Canons 10, 11, 28, 34, 35 (interest adverse to client, client confidence, stirring up litigation, fee and client-relationship rules); modern analog Model Rule 1.8

Other opinions cited:

• American Bar Association opinion (cited without number) holding it improper to buy choses in action below face value

See also

• KBA Ethics Op. E-175: Buying a Disbarred Lawyer's Practice
• KBA Ethics Op. E-148: Suing a Longtime Bank Client

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-012.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-12
Issued: May 1963

Question:

May an attorney purchase an income tax refund from a client for whom he
prepared the tax return at ninety percent of face value where funds for this
are advanced by another client who receives sixty percent of the profit with
the attorney retaining forty percent as his fee?

Answer:

No.

References:

Canon 10, 11, 28, 34, 35
OPINION

A lawyer prepared income tax returns for many of his clients. When a client is
entitled to a refund, he follows the practice of purchasing the refund from the client at
ninety percent of face value, with the understanding that the refund check will be endorsed
over to him when issued. The funds required for this are advanced by another client, who
receives sixty percent of the profit, while the lawyer retains the remaining forty percent as
his fee. We have been asked to determine whether or not this is an ethical practice on the
part of the lawyer.
The American Bar Association held many years ago that it was improper for an
attorney to buy judgments, notes and other choses in action for less than their face value, as
that was in violation of Canon 28, which forbids lawyers to stir up strife and litigation. That
opinion went on to say that even if the conduct was not in violation of Canon 28, it still
constituted conduct beneath the dignity of the profession. It has been said that such conduct
is in violation of Canon 10, which forbids a lawyer from purchasing any interest in the
subject matter of the litigation which he is conducting. It might be said that this conduct
would be in violation of the spirit of Canon 11, which requires a lawyer to refrain from any
action whereby, for his personal gain, he takes advantage of the confidence reposed in him
by his client. Too, this conduct could be interpreted as violating Canons 34 and 35.
All in all, we think that it is improper for an attorney to engage in such practices.
We therefore hold such conduct to be unethical.

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the
Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530
(or its predecessor rule). The Rule provides that formal opinions are advisory only.