Especially When They’d Rather Not

It’s an old jibe that lawyers are miserable businesspeople. Lawyers are too busy dealing with everyone else’s problems to take care of their own. And bookkeeping is such a tedious business, when dealing with clients, adversaries and fine theoretical points of law is so much more fun.

But tedium and busyness won’t help when a lawyer, especially a tax lawyer, fails to report heavy-duty amounts of income and even gets nailed criminally once, when other years get examined for the same sort of thing.

So The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, keeps the SOL open and lays a fraud penalty on Owen G. Fiore, in 2013 T. C. Memo. 21, filed 1/17/13.

Incidentally, this is a bad day for lawyers, as Humphrey, Farrington & McClain, P.C., of Independence, MO, get their unreimbursed expenses recharacterized as loans, per Sections 446 and 481, in 2013 T. C. Memo. 23, filed 1/17/13. Those who like accountancy can read this one for themselves. But at least Humphrey & Co. avoid most of the Section 6662(a) penalty by virtue of their good faith.

Owen G. isn’t so lucky.

Owen G. was a lawyer with an auditing background. Taxation was his specialty, and he was a leader in the field out West, making it rain; finding, wining and dining clients; and delighting his white-shoe partners with a bountiful harvest at the annual bloodbath–I mean compensation meeting.

Finally, Owen G. strikes out on his own, but is a technophobe who keeps insouciant records, doesn’t open bank statements and leaves everything to “his Gal Friday”, who is as technophobic as he is.

IRS finally catches up to Owen G., but the revenue agent is a new hire who gets bogged down on unsubstantiated deductions, not unreported income, and Owen G. gives her a finely-choreographed ballet, using the Macbeth gambit: “Tomorrow and tomorrow and tomorrow”: rescheduling meetings, avoiding, postponing, promising paper and not delivering.

Now IRS calls in one of their gunners, who shows up unannounced, looks around, reads Owen G. his rights, reconstructs income, and Owen G. pleads to one count for one year, reserving his rights for the others. So Judge Holmes has to go through the merit badges of fraud, to see if Owen G. is an eagle scout or a vulture.

Floating over this case is Owen G.’s history: he is a tax attorney with an auditing background. But his sloppy recordkeeping might be attributed to his client-searching and the fact that he went from big firms with lavish accounting support to single-shinglehood (I did that, and let me tell you, after forty years of life in firms large and small, it don’t come easy). So Judge Holmes isn’t clearly convinced, and “clear and convincing” is the standard of proof for fraud.

Now Owen G. failed to play nice with IRS, shucking and dodging. Judge Holmes: “Fiore was a master of delay during the audits and the criminal investigation, repeatedly rescheduling meetings and giving up documents only grudgingly or not at all. He offered implausible explanations about nontaxable deposits and transfers into his general account. Still, he was constantly traveling to develop business, to set up his Idaho retirement, and to advise his clients. He shouldn’t have canceled so many meetings with the IRS, but–though it edges the Commissioner closer to proof of fraud here–it’s not quite clear and convincing given Fiore’s consistency in poor recordkeeping.” 2013 T. C. Memo. 21, at p. 18.

And Owen G. was smart enough not to agree he evaded for any year but the year for which he pled guilty, so IRS can’t argue pattern-of-fraud clearly or convincingly. That the first IRS revenue agent didn’t check out unreported income doesn’t help IRS.

But now comes the meat of Judge Holmes’ analysis, and again, The Great Dissenter goes where few have gone before. “So far, then, it’s not clear whether Fiore had fraudulent intent. But underlying all the factors discussed above is another important question–was Fiore willfully blind to the unreported income?

“Willful blindness is a relatively underdeveloped area of law in Tax Court jurisprudence–at least in fraud cases. In Fields v. Commissioner, T.C. Memo. 1996-425, 1996 WL 530108, at *14, we mentioned willful blindness. Fields received advice from his attorney that he should report commission income and ignored the advice. Id. We reasoned that Fields’s “lack of regard for [his attorney’s] advice was for the primary purpose of evading taxes.” Id. We added that, although not necessary to the conclusion,

‘fraudulent intent can be found by reasonable inference drawn from proof that a taxpayer deliberately closed his or her eyes to what would otherwise have been obvious to him or her * * * a trier of fact may infer that an individual knew of his or her evasion of tax from his or her willful blindness to the existence of that fact.’” 2013 T. C. Memo. 21, at p. 31.

So Judge Holmes goes into willful blindness as proof of culpability in the criminal context at length, and finds that Owen G. knew he needed lots of cash, told a prospective lender he made lots of money, yet didn’t open bank statements, and didn’t keep good records.

“We cannot accept that a person of Fiore’s intelligence, training, and experience was not aware when he filed his returns for 1996 and 1997–at a time when he knew his need for cash was ballooning–that there was a high probability that he was underreporting his income. And we find that he deliberately avoided steps that would have confirmed that underreporting, since all he had to do was read his monthly bank statements to verify the accuracy of his estimates of taxable income that he put on his returns.” 2012 T. C. Memo. 21, at p. 31.

So Owen G. gets hammered for two more years of fraud. What an unhappy end to a career. Read and heed, tax lawyers.