A Tax Court press release noting suspensions and disbarment came out on the heels of the 9th Circuit sustaining the conviction of a former IRS Chief Counsel attorney for tax evasion. Like a moth drawn to a candle, I could not resist reading about these situations. The criminal case raises a statute of limitations issue while the cases in the press release provide pretty standard fare for discipline received. Aside from closely following the criminal case of former Tax Court Judge Kroupa and occasionally reporting on Tax Court disciplinary matters, here, here and here, we leave these types of discussions to Jack Townsend and his excellent Federal Tax Crimes Blog which focuses on this area of the law and brings his expertise to bear. He blogged the Orrock case on January 27, 2022 for anyone wanting his take on the case.
In United States v. Orrock, D.C. No. 2:16-cr-00111-JAD-DJA-1 (9th Cir. 2022) the taxpayer concealed the sale of real property he controlled. He did not report the sale on his personal return and belatedly disclosed the sale in the return of a partnership where he significantly underreported the amount of the sale. From reading the Ninth Circuit opinion, the case looks like a rare prosecution of a single transaction. Most tax evasion cases involve a pattern ,not because it’s necessary for the IRS to establish a pattern, but because establishing a pattern knocks out the defense of the mistaken treatment of a single item or a single year. Because of the background of the defendant, a single event or single year case becomes easier to sell.
I don’t teach criminal tax but in the clinic I do spend a few minutes on criminal tax provisions each semester because inevitably some client has done something that could give rise to criminal tax prosecution. The students, and possibly the client, have concerns which we must take seriously, but I also explain to the students the types of factors that go into the consideration of which taxpayers to prosecute among the many people the IRS could choose. I let them know that the IRS would very much like to prosecute Harvard lawyers because that brings good publicity but would not be as interested in low income taxpayers both because the sentencing guidelines will generally not produce much of a sentence and the appearance of prosecuting individuals who are struggling economically.
The basis for Mr. Orrock’s appeal of his conviction rests on an argument that the IRS took too long to bring the case and not that the IRS failed to prove the offense. I thought that the timing issue he raises was settled and Jack’s post indicates that he did as well. The specific issue is the date from which the statute of limitations to bring the prosecution runs. Mr. Orrock argues that it runs from the date of the filing of the fraudulent return. He is certainly right that it runs from that date and based on that date the IRS brought its case against him too late. The problem, however, is that the date to bring a prosecution of this type also runs from the date of each affirmative act of evasion and he committed an affirmative act of evasion after filing the return and that act restarted the statute of limitations.
On the civil side, the act of evasion in filing the return would create an unlimited statute of limitations to assess so you don’t get into the issue of subsequent affirmative actions. On the civil side, subsequent acts of contrition, like filing an amended return properly reporting the tax liability, don’t restart the statute of limitations as the Supreme Court explained in Badaracco v. Commissioner, 464 U.S. 386, 394 (1984). The Orrock case highlights the fact that once you start with a fraudulent return things can go very bad. While in the criminal context the fraudulent return does not create the same unlimited statute of limitations for criminal prosecution that the fraudulent return creates for civil assessment, it’s still possible to create a long period for the criminal prosecution statute of limitations to run because subsequent affirmative acts often take place.
The Tax Court’s January 24, 2022 press release describes the suspension of two attorneys and the disbarment of a third. In each case the attorney’s problem arises not from actions taken in a case before the Tax Court but from collateral disciplinary action stemming from action taken by their state bar. The Tax Court attaches the relevant order it issues with respect to each individual. The orders set out the path that led to the action by the Tax Court. If you are the subject to disciplinary action by the state bar or the bar of another court, you have a duty to notify the Tax Court within 30 days.
I don’t know how many people in this situation actually report the disciplinary action to the Tax Court within that period though I suspect that’s a small number, and I don’t know how the Tax Court finds these cases, but I do know from reading enough of these orders over the years that the Tax Court takes it seriously. Read the press release if you want the more details on the cases. When the Tax Court’s action simply follows as a collateral matter, the lurid details require going further down the chain. If it weren’t tax filing season, I would expect a comment from Bob Kamman providing those details in the near future on any of the cases with especially interesting fact situations.