Caleb Smith at the University of Minnesota brings us this week’s designated orders. Caleb highlights one case involving a lawyer whose removal from the Tax Court bar we have previously discussed. As he notes, the lawyer was a problem but competent return preparation could have perhaps avoided the whole problem. The more cases I see the more I am convinced that getting the return right is the key to having the tax system work properly and smoothly. To the extent that we can provide the resources and direction to assist people in filing a correct return, everyone will reap rewards from the creation of competent preparation. Keith
“My Lawyer’s A Fraud!” Brown v. C.I.R., Dkt. # 28934-10 (here)
Much of the general public is probably aware of the right to effective counsel. As with many legal issues, popular understanding is cultivated by crime shows like Making a Murderer. Of course, in the very civil world of Tax Court no such right exists. And yet, apart from firing the attorney, might not the petitioner have some recourse for counsel that is so inept as to ruin their case?
This, at least, is the premise that the petitioners in Brown v. C.I.R. would like Judge Halpern to entertain. Their legal theory being that the representation was so bad as to be a fraud on the court, such that the prior decision should be vacated. Indeed, their attorney (Mr. Aka) was so inept that he was disbarred from the Tax Court in a case that was previously covered in Procedurally Taxing here.
But is doing your job poorly the same (or similar enough) as perpetrating a fraud on the court?
To that question, Judge Halpern provides a resounding “no.” And for good reason.
read more...The petitioners in this case appear to be grasping at straws. To be sure, Mr. Aka’s representation seems at best to be ineffective. A glance at the docket shows the situation getting off to a rocky start at an early date with missed deadlines and a frequent failure to respond. Apparently, after trial Judge Halpern even took the extra step of encouraging the petitioner to “supplement [their counsel] with someone with the skills perhaps to reach a settlement” with the IRS. But petitioner took no such action, and his faith in his counsel went unrewarded: shortly thereafter, Mr. Aka missed the deadline to file an opening brief. Instead, one month after the deadline, Mr. Aka filed a motion to extend the time to file an opening brief… and then, before the Tax Court had ruled on the motion, filed this opening brief… after the deadline he had requested. Judge Halpern was unswayed by this attempt, and struck the opening brief as untimely, while taking the extra step of ensuring that petitioner was personally delivered his order striking it. This step was taken so that petitioners could be made all-the-more aware of their attorney’s poor behavior.
When the Judge is implicitly and explicitly telling you your attorney is no good, that is probably because the attorney behaving egregiously bad. And yet, I opened the prior paragraph insisting that the petitioners were grasping in this case by arguing for vacating the decision on grounds of fraud. And that remains so for at least two reasons: (1) the legal standard for fraud on the court doesn’t sync up with the petitioner’s allegations, and (2) petitioners themselves don’t seem particularly sympathetic.
Beginning with the law, what do the petitioners need to show in this case? Quite a bit, actually. Judge Halpern provides various iterations of what fraud on the court is, mostly quoting Abatti v. Commissioner, 859 F.2d 115 (9th Cir. 1988). But really it boils down to proving, through clear and convincing evidence, that there was an intentional plan of deception to improperly influence the Court in its decision, and that the deception actually worked.
It isn’t immediately clear what the petitioner’s think their lawyer’s intentional plan of deception (henceforth, “scheme”) was, and much less clear to see how it “worked” (that is, resulted in the desired outcome by improperly influencing the Court). Petitioner’s offer that the scheme of the attorney was just to cover up his own incompetence.
Maybe.
But did that influence the Court in its decision? If it did, it must not have been in the way intended: the petitioner’s pretty much lost on all issues and Mr. Aka was subsequently disbarred. There is little doubt that Mr. Aka lied (in his excuses about missing deadlines). But to the extent that these lies constitute a scheme, they certainly didn’t work: that is, they did not influence the Court’s decision.
And that is the crux of the issue, and consequently where petitioners begin to appear less sympathetic than they otherwise would. For one, as has already been noted, the Court gave repeated notice to the petitioners that their counsel was inept throughout the proceedings. Petitioners simply decided not to act on those warnings. Only now that everything has (irreversibly) fallen apart, they appear to bring up some novel and serious allegations: namely, that Mr. Aka (1) didn’t offer evidence at trial that would have won the case, and (2) stipulated to facts that petitioners would never have agreed to.
Pretty serious allegations of professional misconduct, if not actually fraud. The only problem is that (1) the petitioners can’t actually point to what this unoffered evidence was, and (2) petitioner signed the stipulation of facts. The stipulated issues were, moreover, read at trial while the petitioner was there, who voiced no objection. These sorts of arguments resemble more and more a taxpayer that is grasping for a lifeline.
Which leads to the final point in this sad saga. It is pretty clear from reading over the actual decision in the case (here) that petitioners would have benefitted tremendously from competent counsel AND competent tax preparation. On the facts as presented in the decision, they almost certainly owe substantial additional tax, but (through their own mistakes), it is difficult to know how much. The returns are a morass of improper Schedule C deductions, impossible-to-align corporate tax returns, and poorly documented management fees. The extraordinarily poorly prepared returns (it is unclear if they were self-prepared) set the stage for the tangled mess that gets to Judge Halpern’s door. A competent tax return preparer could have likely nipped this in the bud (albeit with a tax bill the petitioners would have to contend with), thus saving years of time and resources (of the judiciary, the IRS and the petitioners themselves). For the petitioners in this case it is not clear why they did not avail themselves of competent tax preparation (or counsel): they certainly have the money. It is important to recognize that is not always the case…
When You Can’t Afford Tax Preparation: Hermit v. C.I.R., Dkt. # 15998-17SL (here)
Before becoming a lawyer, I worked at a non-profit that primarily focused on preparing tax returns for low-income taxpayers. The organization was originally founded by accountants in the late 1970s, with the refreshingly non-partisan idea that the ability of people to comply with their tax obligations should not depend on their ability to pay competent professionals. Over time and largely in step with the expansion of the Earned Income Tax Credit, organizations like this expanded nationwide and often took on more of a “financial empowerment” mission. Today, this network generally falls under the umbrella of “VITA” (Volunteer Income Tax Assistance), which must follow certain guidelines to receive blessing from the IRS. But the guidelines on who VITA organizations can serve, particularly with regards to self-employed taxpayers, leave many low-income taxpayers out in the cold. The National Taxpayer Advocate has previously listed this as a “most serious problem” in her annual report to Congress For these taxpayers, their options are (1) hire someone at a rate they can’t afford to prepare their taxes (especially true since these returns implicate Schedule C, which many preparers charge extra for), or (2) try filing on your own, which for many people is akin to being told “try reading Mandarin on your own.”
In Hermit, you have a petitioner that (potentially) falls in this trap. Mr. Hermit did not file a return for 2012, so the IRS did him the favor and sent a SFR based on “nonemployee compensation” (i.e. a 1099-Misc that the IRS had). Mr. Hermit responded to the SFR by requesting that the IRS send him the documents needed to prepare a return on his own since (1) he could not afford a preparer, and (2) he was “alarmed” by the tax on the SFR -which is understandable since it would be treated as 100% profit from self-employment, and wholly subject to SE tax.
Unfortunately, requesting the needed forms is about as far as Mr. Hermit goes in resolving this matter. He does not file any returns, and instead signs and mails a Notice of Deficiency Waiver (Form 5564), along with a request to enter an Installment Agreement at $200/month.
Mr. Hermit, at this point, seems fairly sympathetic taxpayer that is trying to comply. And maybe that accurately summarizes his intentions (I won’t play armchair psychologist any further). But for whatever reason compliance does not ensue. No payments are made on the Installment Agreement and no returns are filed for subsequent years. The story takes a familiar turn: no action from the taxpayer until a Collection Due Process letter is sent, at which point Mr. Hermit states “I have no money to pay this [tax liability].”
I won’t rehash the determination of the CDP hearing, or the Tax Court’s order granting the IRS summary judgment, other than to say that your collection alternatives are limited when you fail to file tax returns, which is what happened here. And although the order does not exactly paint the picture of a blameless petitioner in this case, I can’t help but wonder if, much like the prior case, everything could have been fixed years ago with only the proper tax preparation…
Quick Hits, Long Order: Lamprecht v. C.I.R., Dkt. # 14410-15 (here)
When I saw the name “Lamprecht” I immediately thought I was in for an order dealing with Graev (see previous post by William Schmidt here.) I was surprised when I saw that the order was in response to an IRS motion to compel discovery: what documents could the IRS possibly want from the taxpayer to show IRS supervisory approval?
Of course, there is much more to the world of tax than Graev, and the 20 page order deals not with IRC 6751, but contours of what is and is not an acceptable discovery request. Without going into detail, I will simply note that discovery requests that are “unlimited in time” (for example, “all documents relating to Blackacre, EVER”) are likely to be struck as overly burdensome. I will also note that, while the IRS can use discovery as a way to learn about other taxpayers that may have committed fraud, it cannot make such discovery requests for the sole purpose of discovering information about other taxpayers that aren’t in the case at hand. In other words, when the IRS wants to fish for other bad-actors in a tax case it has to hook them with something pertinent to the case at hand.
The two other orders issued during the week of October 8 – 12 concerned a summary judgment motion for a taxpayer that didn’t like having a notice of federal tax lien filed, but gave no alternative for the IRS (or Tax Court) to consider. They can be found (here) and (here) but will not be discussed in detail.
About Caleb Smith
FYI: AARP Tax-Aide operates under the VITA umbrella but negotiates its own criteria for what is considered out-of-scope. Some districts require their volunteer tax preparers to be IRS-certified at the Advanced level, which permits the preparation of Schedule C as long as the taxpayer is a sole proprietor with no employees.
The standards for “in scope” and “out of scope” Schedule Cs are the same for any VITA volunteer certified at the Advanced level, whether volunteering at an AARP Tax-Aide site or another site. The main limitations: no loss, expenses capped at $25,000, no employees / no contractors, cash method only, standard mileage reimbursement, no depreciation / depletion and no business use of home. That effectively allows only for the preparation of Schedule Cs for independent contractors who provide personal services, notably Uber / Lyft drivers.
Here is the rest of the story on the cited lawyer’s disciplinary history in Tax Court. It is from a July 2018 25-page order from the California State Bar, placing him on probation for three years and suspending him for six months.
Character Evidence
Respondent presented good character testimony from more than 25 witnesses, including five attorneys, a former attorney, and numerous current and former clients, regarding Respondent’s integrity and his fine qualities as an attorney. Two of these character witnesses were clients in matters for which Respondent was disciplined by the Tax Court. Respondent is entitled to substantial mitigation for this character evidence. (Std. 1.6(t).)
Community Service
Respondent presented significant evidence of community service, which is “a mitigating factor that is entitled to ‘considerable weight.’ [Citation.].” (Calvert v. State Bar (1991) 54 Cal.3d 765, 785.) Respondent is the leader of the Los Angeles Chapel One of the All Christian Practical Praying Band (ACPPB), the Regional Leader of the Overseas Region of that organization, and a recognized leader of the Nigerian community in Los Angeles. In addition, Respondent presented persuasive evidence that he devotes significant time performing pro bono work.
Rehabilitation/Remediation
While Respondent inexplicably did not take steps to remedy his deficient practice habits after his reprimand by the Tax Court, he now acknowledges the inappropriateness of his conduct in the Tax Court matters, and he has taken significant steps since his second discipline by the Tax Court to stop and prevent any future misconduct.
http://members.calbar.ca.gov/courtDocs/16-J-15775-2.pdf
‘Much of the general public is probably aware of the right to effective counsel.’
But sometimes that means the lawyer is doing the right thing by being a fraud. For example, replacing an exhibit in order to try to hide some IRS forms that the IRS doesn’t want the petitioner to know about. For example, the day after calendar call, removing the settlement officer’s declaration under penalty of perjury from the collection of documents to be stipulated because the petitioner proved it was perjured. As the judge said, the IRS’s oral statements in court are position statements not perjury because the lawyer isn’t sworn in. For example, stating that the IRS concedes certain issues but the IRS doesn’t actually concede them (though the IRS finally conceded them afer a later, different case’s calendar call). The IRS gets its effective counsel all right.
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‘Over time and largely in step with the expansion of the Earned Income Tax Credit, organizations like this expanded nationwide’
But not where they’re needed, cf. this:
‘or (2) try filing on your own, which for many people is akin to being told “try reading Mandarin on your own.”’
Consider people who can read Mandarin on their own, who might or might not be able to read English on their own, who were born in the US because a parent went there for grad school. They never had any US income, but get the “benefit” of Cook v. Tait. Except, since they can’t get VITA, the “benefit” of Cook v. Tait is only half complete.