The Unspotted Issue in an Audit; Ethics and Crimes (7/24/20; 8/2/20)

In an ABA Tax Section Court Procedure Virtual meeting on Wednesday, there was a one-hour discussion of ethical issues in handling a matter in the Tax Court.  The participants in the discussion were:

• Judge L. Paige Marvel, United States Tax Court, Washington, D.C.
• Elizabeth G. Chirich, Chief, Branch 1, Procedure & Administration, IRS Office of Chief Counsel, Washington, D.C.
• Guinevere Moore, Moore Tax Law Group, LLC, Chicago, IL
• Kandyce Korotky, Covington & Burling, Washington, D.C. (Moderator)
• Mitchell I. Horowitz, Buchanan Ingersoll & Rooney P.C., Tampa, FL

The discussion was excellent.  I highly recommend those who can access the recording of the event on the ABA web site to do so.  (I would provide a link but have not yet located the link, perhaps because the recording has not yet been put up.)

During the discussion I posted two questions which, apparently because of time, the participants did not respond to.  I offer the questions and some comment here.  The questions were:

1.        Question : What if the IRS sets up only one issue in the notice of deficiency and the IRS never spotted a big issue involving omitted income. There is no real gray area in the unspotted issue; the taxpayer clearly would owe tax if the unspotted issue were fully litigated (indeed taxpayer's counsel did not think she could even make a nonfrivolous argument that the omitted income should not have been included). After filing the petition, IRS Counsel offers to concede that one issue (the spotted issue in the NOD) and sends a stipulated decision document saying that the deficiency is $0. Because the taxpayers' counsel knows that stipulation that there is no deficiency is not true, can the taxpayers' counsel sign the stipulated decision?
2.        Question: This may be a philosophical question rather than one you can answer here:  What good are ethical rules when they don't provide answers -- i.e., when different ethical lawyers acting ethically can reach different conclusions -- does that simply reward the aggressive attorney (who may even be a lawyer who charges for the benefit offered to the taxpayer by being aggressive within the ambiguities -- even creative ambiguities -- in the ethical rules) and the taxpayer engaging this ethically aggressive attorney?  And would about the more conservative ethical attorney and his client?  Is the ethically conservative attorney providing less than ethically aggressive representation then not zealously representing the client?  There is more but I'll stop there?

The second question is more philosophical, so I will focus on the first question.  Here is the key background:

Article on Ethics Issues in Referring Clients to Foreign Aggressive Tax Planners/Enablers (12/27/18)

Tax Crimes enthusiasts may be interested in this law review article:  Heather M. Field, Offshoring Tax Ethics: The Panama Papers, Seeking Refuge From Tax, and Tax Lawyer Referrals,, St. Louis U L.J.  62 St. Louis U. L.J. 35 (2017), here.  Excerpts (footnotes omitted):

Despite the investigative research and scholarly analyses of the Panama Papers, many questions remain, including: How did U.S. clients get to the Panamanian law firm of Mossack Fonseca? What were the ethical responsibilities of the individuals (particularly lawyers) who connected these U.S. clients with MF, especially in cases where the U.S. clients sought offshore assistance in order to avoid or evade U.S. taxes? And what, if anything, should individuals in similar situations do differently in the future? 

This Essay starts to answer these questions, and in doing so, fills a gap in the literature. Existing literature on lawyer referrals is relatively limited and generally focuses on referral fees, lawyer referral services, and malpractice actions for negligent referral. And while there is literature about professional responsibility in cross-border matters, discussions of referrals to foreign counsel are relatively brief and tend to focus on malpractice risk for negligent referral or on aiding and abetting the unlicensed practice of law. This Essay considers a specific, and previously unaddressed, type of cross-border referral—one for clients seeking help with offshore tax avoidance or evasion. This situation raises different ethical concerns and implicates tax-specific penalty provisions and standards of conduct. 

This Essay argues that, although the rules governing ethical tax practice generally do not prevent a U.S. lawyer from referring a client to a firm like MF for potentially aggressive tax planning, a lawyer who does so without very careful reflection “passes the buck” for ethical tax practice onto the next lawyer. Rather than expatriating responsibility for the tax practice ethics of representing the client, each lawyer should internalize more of that responsibility and should not blithely provide referrals. 

This Essay proceeds by describing what the Panama Papers reveal about client referrals to MF, after which the Essay briefly explains how the general ethical rules, tax-specific standards of practice, tax penalty provisions, and other constraints apply to a U.S. lawyer making a referral to a firm like MF. The Essay then argues that lawyers should adhere to higher standards when considering such referrals.

* * * * 

CONCLUSION 

A Prosecutor's Ethical Obligations to Disclose Exculpatory Evidence Held Broader than Brady Obligation (4/15/15)

In In re Kline, 2015 D.C. App. LEXIS 141 (D.C. Court of Appeals Apr. 9, 2015), here, the D.C. Court of Appeals upheld a finding that, although a failure to disclose potentially exculpatory evidence might not be a Brady violation, it can violate the disclosure requirement for prosecutors under local bar rules.  The opening paragraph lays out the issue and the resolution:

This matter comes before us upon the Report and Recommendation of the Board on Professional Responsibility ("the Board"). The Board recommended that a 30-day suspension be given to Andrew J. Kline ("Kline") after finding that Kline violated Rule 3.8 (e) of the District of Columbia Rules of Professional Conduct ("Rule 3.8 (e)"). Rule 3.8 (e) prohibits a prosecutor in a criminal case from intentionally failing to disclose to the defense any evidence or information that the prosecutor knows or reasonably should know tends to negate the guilt of the accused. Bar Counsel takes no exception to the Report and Recommendation of the Board. Kline argued, inter alia, that he did not violate Rule 3.8 (e) because his ethical duties are coextensive with the duties imposed under Brady v. Maryland, 373 U.S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). Specifically, Kline relies on the "material-to-outcome" standard recognized by the United States Supreme Court in Brady's progeny to argue that a prosecutor cannot violate Rule 3.8 (e) unless there is a reasonable probability that the information or evidence withheld made a difference in the outcome of the trial. We hold that Kline's interpretation of Rule 3.8 (e), which incorporates a retrospective materiality analysis, is not the appropriate test for determining whether a prosecutor has violated Rule 3.8 (e). We also hold that Bar Counsel proved by clear and convincing evidence that Kline intentionally failed to disclose information in violation of the rule. However, we conclude that given the confusion regarding the correct interpretation of a prosecutor's obligations under the rule, sanctioning Kline would be unwarranted.

The case contains a good discussion of the restricted scope of Brady -- to an ex post facto evaluation of whether the failure to disclose was material to the outcome.  The bar rule, in contrast, is a forward looking prophylactic rule that necessarily cannot be tested by whether it is material to an outcome that has not even occurred:

In short, although significant overlaps exist in a pretrial versus post-trial ethical analysis, it makes little common sense to premise a violation of an ethical rule on the effect compliance with that rule may have on the outcome of the underlying trial, because there can be "no objective, ad hoc way" for a prosecutor "to evaluate before trial whether [evidence or information] will be material to the outcome." See Lewis, 408 A.2d at 307. For that reason, it is important not to use Brady as a "canon of prosecutorial ethics." Commonwealth v. Tuma, 285 Va. 629, 740 S.E.2d 14, 20 n.2 (Va. 2013).

The Court earlier also made this significant comment analysis:

Further, as the Supreme Court recognized in Kyles, "[t]he rule in Bagley (and, hence, in Brady) requires less of the prosecution than the ABA Standards for Criminal Justice, which call generally for prosecutorial disclosures of any evidence tending to exculpate or mitigate." Kyles v. Whitley, 514 U.S. 419, 437, 115 S. Ct. 1555, 131 L. Ed. 2d 490 (1995). The Supreme Court reiterated that basic tenet in Cone, noting that "[a]lthough the Due Process Clause of the Fourteenth Amendment, as interpreted by Brady, only mandates the disclosure of material evidence, the obligation to disclose evidence favorable to the defense may arise more broadly under a prosecutor's ethical or statutory obligations." Cone v. Bell, 556 U.S. 449, 470 n.15, 129 S. Ct. 1769, 173 L. Ed. 2d 701 (2009) (citations omitted).

This violation occurred while Kline was an AUSA working on local prosecutions.  Other jurisdictions have rules that are similar and similarly interpreted.

It might be worth including some type of forward looking request under the local bar rules in addition to requests for Brady disclosures (which under the analysis above is a bit of a non sequitur before trial).  I would think that most prosecutors would not want to take the risk that a retrospective Brady violation may be found and thus would tend, even apart from a bar rule, to err on the side of caution and disclose possibly exculpatory evidence.

Of course, unlike a Brady violation which can give a convicted defendant relief, a bar violation does not per se give the defendant relief.  It merely punishes the prosecutor.

Thanks to the White Collar Crime Prof Blog article:  Solomon Wisenberg, District of Columbia Court of Appeals Makes It Official: Prosecutor's Duty To Disclose Exculpatory Evidence Is Broader Than Brady (White Collar Crime Prof Blog 4/10/15), here.