Department of the Treasury (2004)

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United States

Department of the Treasury

Director, Office of Professional

Responsibility, Complainant-Appellee

Complaint No. 2004-11

(b)(3)/26 USC 6103

, Respondent-

Appellant

Initial Decision on Appeal

Under the authority of General Counsel Order No. 9 (January 19, 2001), and the

authority vested in him as Assistant General Counsel of the Treasury who was the Chief

Counsel for the Internal Revenue Service, Donald L. Korb n May 15, 2006 delegated to

the undersigned authority to decide disciplinary appeals to the Secretary of the Treasury

filed in this matter under Part 10 Title 31, Code of Federal Regulations (Rev. 7-2002)

(“Practice Before the Internal Revenue Service”) (sometimes known and hereafter

referred to as “Treasury Circular 230”). This is such an appeal, timely filed by

(b)(3)/26 USC 6103

, an individual who, during all years relevant, was (i) licensed by the State

of “A”, his state of residence, to practice accountancy as a CPA and law as an attorney,

(iii) authorized to practice before and in fact practiced before the Internal Revenue

Service.

1. Background

On March 1, 2004, Cono N. Namorato, then the Director of the Office of Professional

Responsibility (“OPR”), wrote

0(“Respondent-Appellant”) to

advise him that OPR had received information indicating that Respondent-Appellant

may have been in violation of Subparts B and C of Treasury Circular 230 as in effect

prior to July 26, 2002. Mr. Namorato's letter went on to advise that the pertinent

provisions Respondent-Appellant may have violated included Sections 10.22

(diligence as to accuracy), 10.33 (tax shelter opinions), 10.34 (standards for advising

with respect to tax return positions and for preparing or signing returns.),(b)3/26U

(disreputable conduct) and 10.51 (j) (again disreputable conduct). Further particulars

concerning the allegations were set forth with considerable specificity in Mr.

Namorato's letter.

On April 5, 2004, Respondent-Appellant sent a letter to Mr. Namorato

responding, again with considerable specificity, to the allegations contained in Mr.

Namorato's letter, denying that he had violated any of the provisions of Treasury

Circular 230 he was alleged to have violated.

On June 18, 2004, the Director of OPR, the Complainant-Appellee, filed his

Complaint in this matter.

On July 15, 2004, Respondent-appellant filed his Answer in this matter.

After the issues were joined through the filing of the Complaint and Reply, a

series of motions and other filings were filed by the parties, including a Motion for

Summary Judgment by Respondent-Appellant (which was denied) and a request for

discovery filed by the Respondent-Appellant (also denied after Complainant-Appellee

filed a Motion for Reconsideration of the Administrative Law judge's initial decision

on the discovery motion). To the extent relevant to the issues properly contested

through Appeal in this matter, these issues are addressed below.

On July 20, 2005, a hearing in this matter was held in City #1, “A” before

Administrative Law Judge T. Todd Hodgdon (“the ALJ”), an Administrative Law

judge of the United States Mines Safety and Health Review Commission (the

“MS&HRC”), sitting by designation under an inter-agency agreement between the

MS&HRC and the Department of the Treasury. While the Respondent-Appellant and

his wife were physically present at the hearing, he chose not to participate, claiming

variously that he chose not to do so because (i) he was not represented by an

attorney1 and (2) because he suffered from a profound hearing loss.2 Thereafter, after

having been accorded time to review the hearing record, the parties each filed their

proposed findings of fact and conclusions of law with the ALJ.

On March 2, 2006, the ALJ issued his Decision in this matter, dismissing two of

the Counts in the Complaint (Counts 6 and 13), affirming the remaining Counts in the

Complaint (Counts 1-5, 7-12 and 14) and disbarring Respondent-Appellant from

practice before the Internal Revenue Service.3 In his Opposition to RespondentAppellant's Appeal, Complainant-Appellee does not challenge the ALJ's dismissal of

Counts 6 and 13. Accordingly, this Initial Decision on Appeal is confined to the 12

1 After this matter was commenced but prior to the hearing, Respondent-Appellant voluntarily resigned

from the practice of law in the State of “A”. However, the fact did not prevent Respondent-Appellant from

appearing pro se. Respondent-Appellant also surrendered his license to practice accountancy as a CPA

during this period.

2 Respondent-Appellant's hearing loss and the adequacy of the actions taken by the ALJ and ComplainantAppellee to accommodate Respondent-Appellant's hearing deficiencies are discussed below. For now it

suffices to note that his hearing loss does not explain Respondent-Appellant's failure to present direct

testimony in his own support.

3 A copy of the ALJ's Decision appears as Attachment A to this Initial Decision on Appeal and, to the

extent relevant to the issues properly considered on Appeal, is incorporated as if fully set forth herein.

Likewise, to the extent relevant to the issues properly considered on Appeal, also incorporated as if fully set

forth herein are Attachment B, the Decision on Appeal in Director, Office of Professional Responsibility v.

(b)(3)/26 USC 6103 (a proceeding made public by mutual agreement of the parties), and Attachment C, the

ALJ's January 24, 2005 Order Granting Motion for Reconsideration Order Denying Discovery in this

matter.

Counts affirmed by the ALJ that form the basis o f the A LJ’s determination to disbar

Respondent-Appellant from practice before the Internal Revenue Service,4 and to

certain other issues raised by Appellant-Respondent properly considered on Appeal.5

These 12 Counts fall into three general categories o f offenses.

Counts 1-4 relate to(b)3/26U

, Complainant-Appellee

charged and the ALJ found that Respondent-Appellant’s actions were in violation of

Sections 10.22(a), 10.22(b), 10.51 (b) (b)(3)/26 USC 6103 o f Treasury Circular 230 (Rev.

1994), the version of Treasury Circular 230 in effect on the date o f the alleged

conduct.

Counts 7-12 relate to Respondent-Appellant's actions in(b)3/26U

. As to these actions, Complainant-Appellee

4 And to the related issue of whether the conduct of Appellant-Respondent has been proven to be of a

nature justifying disbarment in the maimer required by Section 10.52 of Treasury Circular 230 (Rev. 1994).

5 Other issues properly raised on Appeal in this matter include: (i) whether the ALJ committed reversible

error by failing to examine “evidence of record" provided by Appellant-Respondent; (ii) whether the ALJ

committed reversible error by disbarring Appellant-Respondent in light of Appellant-Respondent’s offer to

resign voluntarily and irrevocably from practice before the Internal Revenue Service; (iii) whether

Appellant-Respondent was denied due process of the law; (iv) whether the ALJ committed reversible error

in finding that Appellee-Complainant failed to meet his burden of proof by clear and convincing evidence

with respect to each alleged violation of Treasury Circular 230, as required by Section 10.76 of Treasury

Circular 230 (Rev. 7-2002), when the sanction sought was Appellant-Respondent’s disbarment; (v)

whether the ALJ committed reversible error by finding that Appellant-Respondent’s(b

0(vi) whether the ALJ committed reversible error by finding that Appellant1

Respondent violated Section 10.33 of Treasury Circular 230 (Rev. 1994); (vii) whether the ALJ committed

reversible error-by finding that Appellant-Respondent(b

;(viii) Whether the A LJ comm itted reversible error by finding that

Appellan

vslyfn

Jco

ixw

t'(b

Respondent's(b

constituted an admission of wrongdoing. Issues raised by Appellant-Respondent on Appeal that are

not appropriate issues to consider on Appeal in this matter include (a) Respondent’s request that the

Treasury Inspector General for Tax Administration (“TIGTA”) authorize a full investigation into OPR, (b)

Appellant-Respondent's request for a moratorium on Treasury Circular 230 disciplinary proceedings by

OPR pending completion of an independent investigation, (c) Appellant-Respondent's request that a

moratorium on Treasury Circular 230 proceedings until such time as TIGTA has completed its own

investigation and considered the concerns o f the professional tax community, and (d) AppellantRespondent’s contention that the ALJ “failed to acknowledge” that the “IRS Commissioner’s Circular 230

initiative” constituted corruption. While I consider each of these allegations to be without merit, their

consideration is beyond the scope of my authority as the Appellate Authority in these proceedings. The

focus of this matter is Appellant-Respondent’s conduct, whether the ALJ was correct in his determinations

that Appellant-Respondent violated the various provisions of Treasury Circular 230 he was found to have

violated, and whether the ALJ’s proposed sanction of disbarment should be affirmed given the

requirements of Sections 10.52 (a) and 10.52 9 (b) of Treasury Circular 230.

charged and the ALJ found that Respondent-Appellant’s actions were in violation of

Sections 10.22(a), 10.22(b), 10.22(c), 10.33 10.34, and either 10.51 or 10.51 (j) of

Treasury Circular 230 (Rev. 1994), the version o f Treasury Circular 230 in effect on

the date of the alleged conduct.

Counts 5 and 14 relate to Respondent-Appellant's(b)3/26U

, which Complainant-Appellee charged and the ALJ

found were actions in violation o f Sections 10.51 a n d o(b)3/26U

0 f Treasury Circular

230 (Rev. 2002), the version of Treasury Circular 230 in effect on the date of the

alleged conduct.

(b)(3)/26 USC 6103

A summary of Respondent-Appellant’s (b)(3)/26USC6103appears in the testimony o f

Revenue Agent Robert C. Hissam. Hearing Transcript at pp. 58-67 (:Tr. 58-67”). In

brief summary, the (b)(3)/26USC6103 involved the following elements or steps:

(b)(3)/26 USC 6103."

(b)(3)/26 USC 6103.

6 I use the term “made” rather than “act as” because there is an admission in the record, at least with

(b)(3)/26 USC 6103

respect to Respondent-Appellant's

(b)(3)/26 USC 6103

______ Complainant-Appellant charges that Respondent-Appellant ’s(b)3/26U

,one of the Federal

common law doctrines that serve as bedrocks or our Federal Income tax.(b)3/26U

is a single exception to that rule,

There

( b ) ( 3 ) /2 6

S C

6 1 0 3 .

community property states, unless spouses take actions to negate the presumption that

arises under state law (for example, through the execution o f a “three-pronged separate

property agreement”), each spouse is deemed to act as an agent o f the marital estate when

performing personal services and half o f the income arising from the performance of

those services is allocated to each spouse. See Poe v. Seaborn, 282 U.S. 101 (1930):

7For example, Respondent-Appellant

(b)(3)/26 USC 6103

Graham v. Commissioner, 93 F.2d 174 (9th Cir. 1932). “A ” is not a community property

state.

0are described in the excerpt from the Final Judgment of

Permanent Injunction issued against Respondent-Appellant by the United States District

Court for the Middle District of “A” on March 24, 2003, in United States v.

(b)(3)/26 USC 6103, Case No. 3-02-1072, appearing at pages 13-15 o f the A LJ’s Decision

( A t t a c h m e n t A ) . 9 a t tached to the ALJ's Decision (Attachment A).

,Complainant-Appellee has relied on another

bedrock Federal common law principle, ( b ) ( 3 ) / 2 6 U S C 6 1 0 3 ,10 Together

with yet another related but distinct bedrock Federal common law doctrine

(b)(3)/26 USC 6103

. I n contrast,

(b)(3)/26 USC 6103

In c o n tr a s t,

(b)(3)/26 USC 6103

. The two related but

distinct Doctrines have a common origin. See Gregory v. Helvering, 293 U.S. 465

(1935). In a subsequent decision involving a sale/leaseback transaction, the Supreme

Court made clear that the two doctrines were distinct, but that the elements o f proof

required for one might also suffice for the other. Frank Lyon Co. v. United States, 435

U.S. 560 (1978). See also TIFD III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006).

Complainant-Appellee has alleged and the ALJ found that, (b)(3)/26 USC 6103

Consent Judgment and that the Judgment, while prohibiting

icrg

t-A

)(3

future actions on his part, specifically stated

that it was not an admission of past misconduct.

10 Sometimes (and in my judgment more accurately) referred to as the "(b

." (b)(3)/26 USC 6103 g j

(b)(3)/26 USC 6103

Courts have applied this

principle even w h e n the transfe re e (and purported "owner" o f the property) has physical

possession of tangible property when the evidence showed that the transferor retained

dominion and control over the property. For example, following the Supreme Court’s

decision in Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979), taxpayers

holding “excess inventory” tried to claim tax losses with respect to that inventory by

“selling” the inventory to a counter-party. Examining the totality o f the rights and

obligations in those arrangements, the courts found that the counter-party was, in

substance, not a purchaser/owner, but rather functioned as a storage agent for the

purported seller. Rexnord v. United States, 940 F.2d 1094 (7th Cir. 1991), citing

PACCAR. Inc. v. Commissioner, 86 T.C. 754, a f f 'd 849 F.3d 393 (9th Cir. 1988); Volvo

Cars of North America v. United States, 92-2 US. Tax Cas. (CCH) Para. 50,130, 99

A.F.T.R.2d (RIA) 376 (M.D. N.C. 1997). There, the taxpayers sought to circu m v en t a

controlling precedent of the United States Supreme Court.(b)3/26U

My limited functions as the Appellate Authority are described in Section 10.76 of

Circular 230. The Appellate Authority generally cannot reverse the decision o f the ALJ

unless the Appellate Authority finds that the decision o f the ALJ is clearly erroneous in

light of the evidence in the record and the applicable law. An exception to this general

ru le applies in the case of matters that are exclusively matters o f law, where the Appellate

Authority reviews such matters de novo. In the event that the Appellate Authority

determined that there are unresolved issues raised by the record, the Appellate Authority

is authorized, but not required, to remand the case to the ALJ to elicit additional

testimony or evidence. I interpret the term “evidence” to include the consideration of

other legal authorities on mixed issues o f fact and law.

Were I the ALJ hi this matter, I would have asked the parties to address three

issues.

(b)(3)/26 USC 6103.

(b)(3)/26 USC 6103

A s discussed below, this third issues was thoroughly considered by the ALJ, at

far as the ( b ) ( 3 ) / 2 6 U S C 6 1 0 3 is concerned.

3. The Import o f Sections 1060 and 197 o f the Internal Revenue Code o f 1986

Section 1060 of the Internal Revenue Code and the regulations thereunder

establish ordering rules for allocating the aggregate purchase price in taxable asset

acquisitions of entire business among the assets sold and purchased.12 Section 1060 (and

its corollary, Section 338, which applies to taxable corporate stock acquisitions that are

treated as “deemed asset acquisitions") did not create the concept that(b)3/26U

. Nor do they address the question of

(b)(3)/26 USC 6103

Section 197 establishes a ratable 15-year cost recovery regime that permits a taxpayer to

recover his/her/its cost basis in so-called “Section 197 intangibles” (including but not

limited to goodwill, going concern value and workforce in place, other than selfdeveloped intangibles). Again, Section 197 did not create a(b)3/26U

. Rather, Section 197 was Congress’ attempt to

answer two vexing questions that had resulted in a huge volume o f litigation in the

Federal courts: (i) Was the asset in question a wasting asset (a requirement under other

Code provisions if the asset’s cost was to be “recovered” before the asset was disposed of

or the business terminated), and (ii) the period o f time over which the asset wasted and

lost its commercial usefulness. Section 197 ended these controversies with regard to

“Section 197 intangibles,” (b)(3)/26 USC 6103. But Section 197 did not (b)(3)/26 USC 6103

Neither Section 1060 nor Section 197 is relevant to the issues raised in this matter.

The ALJ’s analysis4.TheA

plicatonfb

0( of the applicationo

)(3

f(b)3/26U

)(/2

bappears at pages 11-13 of the ALJ’s Decision

11 All references to the Internal Revenue Code refer to the Internal Revenue Code o f 1986, as amended and

in effect during the taxable years in issue.

12 Section 338 and the regulations thereunder establish similar rules with respect to so-called deemed assets

acquisitions.

(b)(3)/26 USC 6103

13 Indeed.

.See page 11 of the ALJ’s Decision (Attachment A).

(Attachment A).

(b)(3)/26 USC 6103.

(b)(3)/26 USC 6103

C.J. Mathews v. Commissioner, 61 T.C. 12, rev’d 520 F.23 323

(5 Cir. 1975), where on the facts present in that case the Tax Court found that: (i) the

transferor had not maintained substantially the same dominion and control over the asset

after its purported transfer;14 (ii) the leaseback o f the asset was in writing and provided

for the payment of reasonable rent;15 (iii) the leaseback (as distinguished from the initial

transfer of the asset) must have a bona fide business purpose;16 (iv) the transferor must

not retain a disqualifying equity interest in the property (see Section 162(a)(3)). The

(b)(3)/26 USC 6103

are described at page 12 ot the ALJ s D ecision

(Attachment A). For the reasons stated therein, the ALJ found

(b)(3)/26 USC 6103

Under my standards of review, I find no basis to reverse the ALJ. There is ample

evidence in the record that supports the A LJ’s determination that the ComplainantAppellee met his burden of proof on these matters by clear and convincing evidence.

In addition, the ALJ noted one o f the glaring omissions in RespondentAppellant’s argument: No attempt was made to address the decision o f the Fifth Circuit

Court of Appeals in C.J. Mathews v. Commissioner, 520 F.2d 523 (5th Cir. 1975), which

reversed the Tax Court’s decision and applied the economic substance doctrine, finding

that “before the trust’s creation. Taxpayer had operated his business on and with

necessary property - all under his complete control The same was true afterward 14 See discussion of the excess inventory cases, supra.

15 S e e ( b ) ( 3 ) / 2 6 U S C 6 1 0 3 , supra.

16 The Tax Court limited this inquiry to the leaseback because the transfer of the asset to the trust was a

donative transfer, in the Tax Court’s mind negating any need to find business purpose for the transfer.

(b)(3)/26 USC 6103

respectively fully disagree.

(b)(3)/26 USC 6103

(b)(3)/26 USC 6103.

v,In

except he hoped some o f his income had been siphoned off to his children.” Id. At 325.17

See page 13 of the A LJ’s Decision (Attachment A).

(b)(3)/26 USC 6103.

The same argument was more eloquently advanced by Judge Goffe in his concurring

opinion in May v. Commissioner, 76 T.C. 7 (1981). Judge Goffe’s concurring opinion

also contains a lengthy analysis o f prior Federal tax cases involving gift/leaseback

transactions. However, the majority refused to join in Judge Goffe’s concurrence, instead

reaffirming the Tax Court’s opinion in C.J. Mathews v. Commissioner, supra. May

makes much of whether the trust acting as the counter-party in the transaction is

controlled by the transferor or members o f his/her immediate family or is under the

control of parties exhibiting independent management, judgment and direction.

(b)(3)/26 USC 6103

5. Applying the Treasury Circular 230 Standards

In order to disbar Respondent-Appellant from practice before the Internal

Revenue Service, Complainant-Appellee must meet three burdens. The first is proving

that his allegations of violations under Treasury Circular 230 (Rev. 1994) have been

established by clear and convincing evidence. Section 10.76 o f Treasury Circular 230

(1994). Second, that clear and convincing evidence must sustain a finding that that

Complainant-Appellee had met each element o f proof required to sustain a finding that

Respondent-Appellant had violated the specific provisions of Treasury Circular 230

charged. Third, in order to disbar or suspend a practitioner from practice before the

Internal Revenue Service, Complainant-Appellee also must prove, again by clear and

convincing evidence, that the violation is either willful (in the case o f any violation o f

Treasury Circular 230 (Rev. 1994) or, only in the case o f violations o f Sections 10.33 and

10.34 of Treasury Circular 230 (Rev. 1994), the result o f either willful, reckless or

grossly incompetent conduct. Sections 10.52 (a) and 10.52 (b) o f Treasury Circular 230

(Rev. 1994).1

178

17After the Fifth Circuit’s opinion in C.J. Mathews, the Fifth Circuit was divided into the Fifth and 11th

circuits and opinions of the former Fifth Circuit were adopted as controlling precedents in the 11th Circuit.

18Section 10.52 of Treasury Circular 230 (Rev. 7-2002) contains a similar provision, but extends the

requirements to censures as well as disbarments and suspensions.

The Charges Pertaining to

(b)(3)/26 USC 6103

Counts 1, 2, 3 and 4 relate to Respondent-Appellant’s conduct(b)3/26U

(b)(3)/26 USC 6103

.In those Counts, Respondent-Appellant is

charged with having violated Sections 10.22(a), 10.22(b), 10.51(b) S a m e o f Treasury

Circular 230 (Rev. 1994). In his Decision, the ALJ affirmed the ComplainantAppellant’s conclusion on these charges.

Section 10.22(a) required attorneys, CPAs, enrolled agents and enrolled actuaries

to exercise due diligence in preparing or assisting in the preparation of, approving and

filing returns, documents, affidavits and other papers relating to Internal Revenue Service

(b)(3)/26 USC 6103

matters. There is no dispute th at

. The ALJ found that there was clear and

convincing evidence in the record indicating that Respondent-Appellant did not. Under

my standard of review, I find that the A LJ’s determination in this regard is not clearly

erroneous.19 As noted above, Complainant-Appellee must also establish and the ALJ

must find that Respondent-Appellant acted willfully within the meaning o f Section

10.52(a) o f Treasury Circular 230 when he failed to exercise due diligence. I will discuss

the issue of willfu lness later in this Initial Decision on Appeal as it related to all the

charges where it is relevant. For now, it suffices to note that, at pages 17 and 18 o f his

Decision (Attachment A), the ALJ found that Respondent-Appellant’s conduct was

willful. There is ample evidence in the record to support that Complainant-Appellant has

proved by clear and convincing evidence that Respondent-Appellant willfully violated

Section 10.22(a). I AFFIRM

Section 10.22(b) required attorneys, CPAs, enrolled agents and enrolled actuaries

to exercise due diligence in determining the correctness o f oral or written representations

made by him to the Department o f the Treasury. My comments respecting the Section

10.22(a) charge are equally applicable here. For the reasons expressed above, I AFFIRM

the A LJ’s finding that Complainant-Appellee has proved, by clear and convincing

evidence, that Respondent-Appellant violated Section 10.22(b) and did so willfully.

Section 10.51(b) made it disreputable conduct for attorneys, CPAs, enrolled

agents or enrolled actuaries to give false or misleading information to the Department of

the Treasury or any officer or employee thereof, or to any tribunal authorized to pass

upon Federal tax matters, knowing such statements to be false or misleading.

(b)(3)/26 USC 6103

analogy to Section 10.51 (j), I conclude that the term other information” includes a

(b)(3)/26 USC 6103

know ing m isstatem ent o f either fact or law, and consequently

.The ALJ concluded (hat Respondent19Indeed, were I the ALJ in this matter. I would have found the evidence in this matter to have been not

(b)(3)/26 USC 6103.

only clear and convincing but overwhelming.

Appellant furnished information)

(b)(3)/26 USC 6103

and appropriately noted as one of the bases for his finding that RespondentAppellant was an experienced attorney who specialized in tax planning. See page 8 of

the A LJ’s Decision (Attachment A). In concluding that Respondent-Appellant’s conduct

was “knowing.” the ALJ stated that there was clear and convincing evidence that

(b)(3)/26 USC 6103

Respondent-Appellant “knew, or should have known"

. Id.

“Knew, or should have known” is not the required element o f proof for a violation of

Section 10.51(b) of Treasury Circular 230 (Rev. 1994). Rather, the required proof is that

Respondent “knew” that (b)(3)/26 USC 6103 . If my review o f the A LJ’s overall

decision left me with any doubt whether the ALJ had found Respondent-Appellant’s

conduct to be “knowing” and was merely stating that he “should have known” that his

conduct violated Section 10.51(b) o f Circular 2 3 0 , I would be required to vacate and

remand the A LJ’s decision on this point for consideration by the ALJ under the correct

legal standard. However, given the A LJ’s determination that all Respondent-Appellant’s

conduct was “willful,20” I have no doubt that the ALJ found that Respondent-Appellant

“knew” his conduct was in violation o f Section 10.51(b) o f Treasury Circular 230.

Section 10.51(j) o f Circular 230 provided that attorneys, CPAs, enrolled agents

and enrolled actuaries could be disbarred or suspended from practice from practice before

the Internal Revenue Service for giving a false opinion, knowingly, recklessly, or through

gross incompetence, including an opinion which is intentionally or recklessly misleading,

or a pattern of providing incompetent opinions on questions arising under the Federal tax

laws. For purposes of Section 10.51(j), I find that the term “opinion” is not confined to

formal legal opinions, but extends to all written and oral advice on material Federal tax

matters. As noted above, false opinions include those that reflect or result from a

knowing misstatement of fact or law. “Reckless conduct,” for purposes for Section

10.51(j), was defined as “a highly unreasonable omission or misrepresentation involving

an extreme departure from the standards o f ordinary care that a practitioner should

observe under the circumstances.” Section 10.51(j) also provided that the term “gross

incompetence” includes conduct that reflects gross indifference, preparation which is

grossly inadequate under the circumstances, and a consistent failure to perform

obligations to a client. As stated above, the ALJ concluded that all o f RespondentAppellant’s conduct was “willful.” I find that such a finding is also dispositive o f the

issue of whether Respondent-Appellant’s violations o f Section 10.51(j) were “knowing.”

For reasons described below (in my comments on what constitutes “willful” of

“knowing” conduct under Circular 230 (Rev. 1994), I AFFIRM the A LJ’s findings with

respect to Section 10.51(j). Since the ALJ concluded that Respondent-Appellant’s

conduct was “knowing,” there was no need for the ALJ to consider whether the same

conduct was also “reckless” or “grossly incompetent.”

The Charges Pertaining to

(b)(3)/26 USC 6103

Counts 7, 8, 9, 10, 11 and 12 allege that Respondent-Appellant violated Sections

10.22(a), 10.22(b), 10.22(c), 10.33, 10.34 and 10.510) o f Treasury Circular 230 (Rev.

20 See pages 18 and 19 of the ALJ's Decision

1994) by

(b)(3)/26 USC 6103.

For the reason stated above in connection with the charges made with respect to

Respondent-Appellant's conduct(b)3/26U

, I AFFIRM the ALJ's findings with respect to

Respondent-Appellant’s violations o f Sections 10.22(a) and 10.22(b) in connection with

his advice to his clients.

As I find the same factors dispositive o f whether Respondent-Appellant failed to

exercise due diligence in determining the correctness o f oral or written representations

made by him to clients with reference to any matter administered by the Internal Revenue

Service, I likewise AFFIRM the A LJ’s finding with regard to Respondent-Appellant’s

alleged violations of Section 10.22(c) o f Treasury Circular 230 (Rev. 1994).

With regard to the A LJ’s finding that Respondent-Appellant’s conduct violated

Section 10.33 of Treasury Circular 2 3 0 ,1 REVERSE the A LJ’s determination. I do so

for two reasons.

First, I find that

(b)(3)/26 USC 6103

S ectio n 10.33(c)(2 ) o f Treasury

Circular 230 defines a “tax shelter” as an “investment” which has as a significant and

intended feature for Federal income or excise tax purposes “either o f the following

attributes: (i) Deductions in excess o f income from the investment being available in any

tax year to reduce income from other sources in that taxable year; or (ii) Credits in excess

of income from the investment being available in any year to offset taxes on income from

other sources in that year."(b)3/26U

,(b)(3)/26 USC 6103

(b)(3)/26 USC 6103.

This definition of a “tax shelter is far narrower than the definition of “tax shelter” contained in many

Code provisions, including those intended to apply to a wider range of potentially abusive tax avoidance

Second, Section 10.33(c)(3) defines a “tax shelter opinion” as an opinion directed

to a person other than the client who engaged the practitioner. That is, Section 10.33 is

only addressed to third-party opinions provided to one party but intended to be relied

(b)(3)/26 USC 6103

upon by another.

Section 10.34 of Treasury Circular 230 (Rev. 1994) made it a violation of

Treasury Circular 230 for a practitioner to “advise a client to take a position on a [Federal

tax] return, or prepare the portion o f a [Federal tax] return on which a position is taken

unless - [either] (i) [t]he practitioner determines that the position satisfies the realistic

possibility standard; or (ii) [t]he position is not frivolous and the practitioner advises the

client of any opportunity to avoid the accuracy-related penalty in [S]ection 6662 of the

Internal Revenue Code of 1986 by adequately disclosing the position and o f the

requirements for adequate disclosure.” Section 10.34(a)(1) o f Treasury Circular 230

(Rev. 1994). Section 10.34 went on to provide standards o f conduct for practitioners in

advising clients on potential penalty exposure (including the requirements for adequate

disclosure) (see Section 10.34(a)(2) and to provide the following definitions o f “realistic

possibility” and “frivolous:”

“A position is considered to have a realistic possibility o f being sustained on its

merits if a reasonable and well-informed analysis by a person knowledgeable in

the tax law would lead such a person to conclude that the position has

approximately a one in three, or greater, likelihood o f being sustained on its

m erits...” Section 10.34(a)(4)(i) o f Treasury Circular 230 (Rev. 1994).

“A position is frivolous is it is patently improper.” Section 10.34(a)(40(ii) of

Treasury Circular 230 (Rev. 1994).

(b)(3)/26 USC 6103

Under my standards of review, find no basis for reversing the ALJ on this point, o f in

his determination that Respondent-Appellant’s conduct was “willful” within the meaning

of Section 10.52(a) of Treasury Circular 230. I therefore AFFIRM the A LJ’s findings on

these matters.

transactions (“PATATs”). The fact that a

(b)(3)/26 USC 6103.

Indeed, had I been the ALJ, I too would have found clear and convincing evidence that Respondent(b)(3)/26 USC 6103.

Appellant’s

The Charges Pertaining to (b)(3)/26 USC 6103

In dealing with Counts 5 and 6 o f the Complaint which respectively charge that

Respondent-Appellant violated Sections 10.51 and (b)(3)/26USC6103o f Treasury Circular 230

(Rev. 1994), the ALJ dismissed Count 6 noting that Section

0required a showing

that Respondent-Appellant

( b

) ( 3

) / 2

Noting that Complainant-Appellee had not even charged that Respondent-Appellant

,th e A

dismissed Count 6. However, he agreed that Section 10.51’s “includes, but is not limited

to" language with respect to “disreputable conduct” covered(b)3/26U

o f the Internal Revenue Code o f 1986, as amended and in effect at

the time of the proscribed conduct. This left the ALJ in a position to find that

(b)(3)/26 USC 6103

. I concur with this part o f the A LJ’s analysis.

However, I do not agree that Complainant-Appellee had yet proved by clear and

convincing evidence that Respondent-Appellant(b)3/26U

I. agr ee that the standard to be used for comparison is

. I find that Complainant-Appellee has not yet met his burden

o f proof on one element o f his burden o f proof on that matter. The cases under (b)3/26U

suggest that Complainant-Appellee can meet his burden in this regard either by

(b)(3)/26 USC 6103

showing that Respondent-Appellant

(b)(3)/26 USC 6103

See United States v. Poll, 521 F.2d 329, 333 (9 Cir .

1975), citing United States v. Bishop, 412 U.S. 346, 360-361 (1973). There were some

indications in materials submitted by Respondent-Appellant in support o f his Motion for

Summary Judgment that(b)3/26U

espondt-A

The ALJ correctly indicated that

those indications were not “evidence” he could consider in these proceedings since

Respondent-Appellant chose not to present those matters in evidence by testifying. If

Respondent-Appellant’s (b)(3)/26 USC 6103 were a matter that would have been appropriately

raised only by affirmative defense, I would have affirmed the A LJ’s findings on this

charge. But since I find this is an element o f Complainant-Appellant’s proof, I VACATE

AND REMAND this charge to the ALJ so that he can determine whether he requires

Complainant-Appellee to introduce additional evidence on Respondent-Appellant’s

(b)(3)/26 USC 6103, or whether he is prepared to reach a finding on that point on the basis of

evidence already in the record.24

24 O f course, either the Complainant-Appellee is free to withdraw this charge, and the ALJ is free not to

consider it and have the case considered solely on the basis of the 10 Counts where I have affirmed the

findings of the ALJ.

(b)(3)/26 USC 6103

IfindthattheALJwascorrectinfindingthat(b)(3)/26USC6103

and that Respondent’s conduct was

“willful” within the meaning o f Section 10.52(a) o f the same Circular. I AFFIRM the

A LJ’s determination on this charge.

“Willful"

Treasury Circular 230 (Rev. 1994) contains no definition o f the word “willful.”

In a Decision on Appeal in another case, I noted my belief that, absent a definition o f the

term in Treasury Circular 230 (Rev. 1994), I found it appropriate to look to cases

interpreting criminal provisions of the Internal Revenue Code o f 1986 for guidance.27 In

his Decision, the ALJ noted that, in United States v. Pomponio, the Supreme Court

determined that “willfulness” simply meant “a voluntary, intentional violation of a known

legal duty.” See page 18 of the A LJ’s Decision (Attachment A). The other cases

examined in the Decision on Appeal in (b)(3)/26USC6103also suggests that (i) an honest but

mistaken belief in the law, even if that belief is unreasonable, is not a “willful” violation

of the law, (ii) that is appropriate to examine how unreasonable a purported belief is in

view o f a person’s background and experience in making a determination o f whether a

person’s belief is truly “honest,” and (iii) that in determining whether a belief is “honest,”

it is important to distinguish between (a) a belief as to what the law is, and (b) a belief in

what the law should be. Only the former qualifies as an “honestly held belief.” Applying

these standards to Respondent-Appellant’s conduct on the 10 Counts where I have

AFFIRMED the ALJ, I find ample evidence to support the A LJ’s finding that

Complainant-Appellee met his burden o f proof by clear and convincing evidence that

each of these violations of Treasury Circular 230 (Rev. 1994) were willful.

6. Other Matters on Appeal

“The Purported Exclusion o f “Evidence o f Record.” This claim is apparently a of

the fact that the A LJ’s appropriate determination that evidence could only be introduced

through appropriate witness testimony, rather than as Exhibits submitted in support of

Respondent-Appellant’s purported Motion for Summary Judgment, a document the ALJ

found was neither an accurate reflection o f the law or supported by credible claims that

the issues presented by the Motion could be considered on the basis o f uncontested facts

on every material issue. I find this claim to be without merit.

25 And “Known”

26 Nor does Treasury Circular 230 define the words "know” or “known.”

27 My lengthy consideration of these precedents and their relevance to Treasury Circular 230 Proceedings

appears at pages 40 through 59 and 65 through 66 of the Decision on Appeal in Director, Office of

Professional Responsibility v. (b)(3)/26 USC 6103 Complaint No. 2002-11 (Attachment B).

Respondent-Appellant's Claim That He Should Have Been Allowed to Voluntarily

Resign From Practice Before the Internal Revenue Service. This claim is without merit.

Respondent-Appellant has for many years been authorized to practice, and has in fact

practiced, before the Internal Revenue Service. While practicing before the Internal

Revenue Service, he engaged in all the conduct which became the subject of the charges

against him. That said, the Director, Office of Professional Responsibility, was wholly

within his rights when he commenced these proceedings by filing his Complaint, and

when he continued his prosecution of the matter. The Internal Revenue Service has a

valid interest not only in sanctioning the conduct of this practitioner, but in making other

practitioners aware that, if they engage in similar conduct, they too will face sanction.

Respondent-Appellant's Due Process Claims. Respondent-Appellant has made a

number of Due Process claims, all without merit. Each is discussed below.

Respondent’s hearing Deficiencies - Neither Complainant-Appellee nor the ALJ

contest that Respondent-Appellant suffers from a significant hearing deficiency. Both

took steps to accommodate that deficiency. The Complainant-Appellee allowed

Respondent-Appellant’s wife to assist him in all phases of these proceedings, including

the hearing in City #1, “A”. As noted at page 19 of the ALJ’s Decision, a number of

efforts were undertaken at the hearing in an attempt to assist Respondent-Appellant with

the problems caused by his hearing deficiencies. For example, Respondent-Appellant

“reads lips” and has some remaining hearing capacity. The ALJ moved his table closer to

the witness stand, repositioned counsel so that he could read counsel’s lips, tried an

amplified audio system and allowed his wife, who is not hearing impaired, to sit next to

him. Respondent-Appellant’s complaint is that these efforts did not go far enough, and

that other acoustic devices may have better addressed his hearing deficiencies. My

“cold” reading of the hearing transcript leads me to believe that Respondent-Appellant

could understand at least some of what occurred at the hearing. Further, ComplainantAppellee had shared all of his evidence with Respondent-Appellant prior to the hearing,

as well as having shared with Respondent-Appellant the details of the charges against

him. Further, Respondent-Appellant has provided no explanation as to why he could not

himself provide the additional audio equipment needed to address his hearing deficiency.

In view of these facts, I do not find that these facts constitute a denial of due process.

Denial of Discovery - For these reasons stated in the ALJ’s Order Granting

Motion for Reconsideration Order Denying Discovery (Attachment C), this claim is

without merit.

Providing Counsel - Respondent-Appellee, like all United States citizens, has no

Constitutional right to have the Government pay his attorney’s fees in any civil matter.

Neither is Respondent-Appellant accorded the right to have his attorney’s fees paid by

the Government by any provision of Treasury Circular 230 (Revs. 1994 or 2002-7.) This

claim is without merit.

Ex Parte Communications - The limited contacts that occurred were to cover

procedural matters relating to all Treasury Circular 230 cases and involved an ALJ other

than the ALJ how handled the case. This claim is without merit.

A LJ’s Lack of Tax Expertise - Respondent-Appellant complains that he has been

prejudiced by what he claims is a lack o f tax expertise in the ALJ. I note at the outset

that I have no idea of the nature and extent o f the A LJ’s tax expertise. The Department

of the Treasury has arranged for Administrative Law judges from other Executive Branch

Departments and Agencies, such as the ALJ in these proceedings, to assure that the

persons discharging the important functions discharged by the ALJs in Treasury Circular

230 are, in fact and perception independent o f the charging Agency, the Internal Revenue

Service. Among, the functions o f the Secretary’s Delegate acting as the Appellate

Authority in these proceedings is to assure that someone with significant tax experience

reviews the Decisions o f the ALJs. When the Circular 230 process as a whole is

examined, Respondent-Appellant has no credible claim that his conduct has not been

examined by someone with significant relevant tax experience. This claim is without

merit.

Respondent-Appellant's Allegations Concerning the A L J ’s References to

(b)(3)/26 USC 6103

Respondent-Appellant's

Respondent-Appellant claims that the A LJ’s repeated references to his failures to

(b)(3)/26 USC 6103

testify and let a Federal court examine

was “an admission of

wrongdoing” by Respondent-Appellant, The opportunities to join the issue on the merits

to which the ALJ referred, and Respondent-Appellant’s explanations o f his actions are

summarized below.

(b)(3)/26 USC 6103

- Here, Respondent-Appellant said that he “fell on his sword” because he has

(b)(3)/26 USC 6103

received advice from an unnamed “A” lawyer that an

. Respondent28 In my case, I have over 37 years of experience as a tax lawyer, with over 29 of those years having been

spent in private practice and over 8 years spent in Federal Government Service as either an Assistant to the

Commissioner of Internal Revenue (November 1977 through January 1981) or as a Special Counsel in the

immediate Office of Chief Counsel, Internal Revenue Service (October 2002 to Date). While in private

practice, my tax work was evenly divided between tax planning and tax controversy work (including tax

litigation). While in private practice, I was a Member of the American Bar Association’s Tax Section, and

o f that Section’s Administrative Practice and Standards of Tax Practice Committees, served as the Chair of

its Administrative Practice Committee and Co-Chair of it s Pro Se Taxpayer and Civil Tax Penalties Task

Forces, and later served as the Council Director responsible for the Section's Private Clients Group and

Procedure Group. While I was their Council Director, the Private Clients Group was composed of the

Estate and Gift Tax Committee, the Committee on the Income of Estates and Trusts, and the Committee on

Divorce Taxation, while the Procedure Group was composed of the Administrative Practice Committee, the

Court Procedure Committee, the Civil & Criminal Tax penalties Committee, the Committee on the

Standards of Tax Practice and the Civil Tax Penalties task Force. I believe that experience, together with a

reputations for integrity and independence. were the reasons I was selected to act as the Appellate

Authority in these proceedings.

Appellant did not name or provide an affidavit from any lawyer to that effect. Any

(b)(3)/26 USC 6103

decision

(b)(3)/26 USC 6103

There is

, but it never came into evidence because Respondent-Appellant failed to testify.

The ( b ) ( 3 ) / 2 6

U S C

6 1 0 3 - Here, Respondent-Appellant's claim is that

he failed to testify because the matter would have been difficult and costly to pursue,

particularly given the withdrawal o f his attorney due to a conflict o f interest. An affidavit

confirming the reason for the withdrawal o f M ark Westlake, Respondent-Appellant’s

attorney in this matter, was attached to Respondent-Appellant’s motion for Summary

Judgment. When Respondent-Appellant chose not to testify, that Affidavit was not

admitted into evidence. It should be noted, however, that Mr. W estlake’s Affidavit is

(b)(3)/26 USC 6103

leaving the

interesting question o f whether Westlake would have been willing to file pleadings

assertin g ( b ) ( 3 ) / 2 6 U S C 6 1 0 3 under Federal Rule of Civil Procedure 11 had the

( b ) ( 3 ) / 2 6 U S C 6 1 0 3 proceeded to a trial on the merits.

I do not read the A LJ’s comments as an indication that he viewed RespondentAppellant’s actions (or inactions) as admissions. Rather, I take the A LJ’s comments as

an indication that these facts, together with all the other facts he considered, caused the

ALJ to form an overall impression Respondent-Appellant’s credibility. The ALJ as the

Trier of fact was fully justified in doing so. This claim is without merit.

7. Conclusion

For the reasons set forth above, I:

AFFIRM the ALJ's findings with regard to Counts 1, 2, 3, 4, 7, 8, 9, 10,

12 and 14;

REVERSE the ALJ's findings with respect to Count 11 (the Section 10.33

charge); and

VACATE AND REMAND the ALJ's findings with regard to Count 13

(the Section 10.51 Charge).

I also VACATE AND REMAND to the ALJ the question of the

appropriate sanction to impose against Respondent-Appellant in light of the

charges ultimately sustained, an issue I will again review following after the ALJ

issues a Decision on remand.

This Initial Decision on Appeal DOES NOT constitute FINAL AGENCY

ACTION in these proceedings.

David F. P. O'Connor

Special Counsel to the Senior

Counsel

Office of Chief Counsel

Internal Revenue Service

(As Authorized Delegate of Henry

Paulson, Secretary of the Treasury)

October 5, 2007

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.