CA1: a bad, unpublished case on tax evasion and privileged materials

US v. Schussel, No. 07-2095 (8/29/08) (unpublished).  Again, why the hell was this unpublished.  This is freakin’ major case in criminal and tax practice.  What the hell is the First thinking?  Are they trying to hide something?  Or are they trying to avoid writing a “precedential” case on tax privilege issues, because there are other ones in the pipeline which are not criminal -- yet.  Essentially this is what happens when you think you can hide assets in Bermuda and hope that it all turns out okay in the morning.  I don’t have too much sympathy for this kind of person.  He also fabricated documents, and tried to replace computerized records.  I know a couple of the actors in this case (and they luckily they are documented as behaving ethically as they always do).  However, this case demonstrates the principles in tax practice known as “what goes around comes around.” 

In October 2001, Darlene Flint, who had worked as Gomes’ secretary for 18 years, walked into the IRS office in Stoneham, Massachusetts, with a box of DCI records that included the Bermuda account records.  This disclosure triggered a criminal investigation of DCI and its employees

It also demonstrates why certain kinds of tax clients are really a bitch to deal with, and what sort of trouble tax lawyers flirt with.  Anyway, back to that law stuff.

The biggest problem with this opinion is that the First seems not to understand that there is a difference between rules of professional responsibility and privilege.  Rules of professional responsibility generally govern the relationship between the client and the lawyer.  Usually they are written to make it easier to represent a client, and in the case of privileges, many rules reflect our common-law understanding of such privileges.  But these are different issues.  The First seems to flip back and forth between privileges and rules of professional responsibility to reach the result it wants.  This makes this one of the worst opinions of the year.

Looking at the actual holdings... oh wait.  They appear below the fold.

A fax asking a tax lawyer to ask an IRS agent when a records room can be dismantled isn’t privileged since it is meant to be disclosed to the agent.  Fair enough.

The crime-fraud exception to the attorney-client privilege applies regardless of whether the lawyer was in on it or not.  The First writes that “The crime-fraud exception may apply, however, even if the client is ultimately found not to be guilty. By necessity, the assessment of documents during a legal proceeding is generally preliminary and does not reflect a finding that a client acted wrongfully.”  This has always been a paradox in the crime-fraud exception, because the “level of proof” is “Reasonable cause.”  Isn't that like probable cause?  If not, what is the difference?

Moreover, attorneys can turn over documents necessary to defend themselves from criminal investigations.  But, the First seems to take this a step further and, even though the government didn’t indict the attorney, it doesn’t resolve the underlying problem: that the document actually was privileged.  (The First seems to be confusing confidentiality with privilege here.)  Therefore, the First concludes that the sanction of suppression isn’t warranted for inducing the lawyer into turning over the document, even if he wasn’t informed that the government was demanding the documents from his attorney.  Then, the First says “whatever the case, the error is harmless.” 

Also, the First says that if a client transmits information so that it can be used on a tax return that isn’t privileged.  I am not 100% sure about this.  I think the inquiry is a bit more fact specific.  In some cases lawyers actually preparing returns (especially amended returns) DO scrutinize to analyze the positions taken by the clients.  Is the First even paying attention?

The defendant mater the argument that under Cheek, he was entitled to and instruction that “the jury that it could not find guilt unless it concluded that Schussel knew he had a legal duty to reject his attorney’s advice, which was based on the misinformation that Schussel had supplied to him.”  Okay, that is going a bit far.  Cheek only requires specific intent.

A more interesting question is whether the “perjury” standard for misleading applies to tax evasion.  (Essentially, under the law of perjury, merely misleading answers are not perjury).  Turns out, in tax evasion, literal truth isn’t a defense.