Tuesday, April 10, 2012

Funds Misappropriated from Credit Suisse Account Held Taxable (4/10/12)

In Bailey v. Commissioner, T.C. Memo. 2012-97, here, the petitioner, a lawyer of fame and infamy (Wikipedia entry here), represented himself in a Tax Court case where his own foreign account at Credit Suisse played prominently in one of the several issues involved.  I quote below from the Tax Court's summary of the opinion:
P, a lawyer, represented a criminal defendant who was cooperating with the Federal Government by facilitating the transfer of his foreign assets as restitution. In 1994 P entered into an unusual unwritten agreement with the Government, pursuant to which he would use an existing foreign account of his own to hold $6 million of the client's stock and make expenditures to facilitate the client's plan. P sold some of the stock and borrowed against the remainder, using some of the proceeds for the client's business but also transferring some to other accounts from which he made personal expenditures of his own. He later repaid the funds he had spent for himself. 
Held: P realized income not when he received the stock, sold it, or borrowed against it, but only when he transferred sale proceeds to other accounts from which he later made personal expenditures.
Basically, the holding is that, when the transfers from the advance account occurred to the other accounts (such transfers not contemplated by the agreement with the Government), the petitioner had misappropriate the funds, thereby causing the misappropriated amounts to be taxable.  See James v. United States, 366 U.S. 213, 219 (1961).

One other fact:
As a result of his handling of the Duboc matter and the Biochem Pharma stock, Mr. Bailey was disbarred. n14
   n14 The court orders concerning Mr. Bailey's disbarment are, of course, public records. See In re Bailey, 2005 WL 2901885 (D. Mass. Nov. 1, 2005), aff'd, 450 F.3d 71 (1st Cir. 2006); Florida Bar v. Bailey, 803 So.2d 683 (2001); In re Bailey, 786 N.E.2d 337 (Mass. 2003). However, the Commissioner did not attempt to bind Mr. Bailey to any findings reflected therein, and we do not derive facts from them nor attempt to reconcile our findings with them.
There is no indication whether he filed the FBAR for the account or, if not, whether any penalties were involved.  I do note that the years involved were 1993-2001.  The first audit was opened in 1994, with others opened in later years and the statute being opened because petitioner signed Forms 872, consents to extend the statute of limitations.  (See p. 52 fn. 29.)

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