Sixth Circuit Affirms That Tax Shelter Exclusion Bars Coverage for Suits against Accounting Firm

In a win for Wiley Rein’s client, a federal appeals court, applying Tennessee law, affirmed a federal district court decision holding that a tax shelter exclusion in an accounting firm’s professional liability policy precluded coverage for two underlying complaints alleging that the insured implemented investment strategies constituting illegal tax avoidance schemes. Financial Strategy Group, PLC v. Continental Cas. Co., No. 14-6296 (6th Cir. Aug. 4, 2015). Wiley Rein LLP represented the insurer in this case.

In affirming the district court’s decision, the United States Court of Appeals for the Sixth Circuit rejected the insured’s contention that the tax shelter exclusion did not apply because the insured did not design the tax shelters at issue, but only prepared tax returns. According to the appellate court, the fact that the insured provided tax advice regarding the tax shelters constituted “recommendations” as specified in the exclusion and, therefore, the exclusion applied.

The appellate court also agreed with the district court’s finding that all of the allegations in the complaints “arose out of” tax shelters subject to the exclusion. Finally, the appellate court found that the “concurrent causation” doctrine did not apply to save coverage for the underlying complaints because the preparation of the tax returns at issue, which generally is covered under the policy, “amount[ed] to the recommendation of illegal tax shelters” and was, therefore, excluded from coverage.