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Ethically Speaking Tax Liabilities by Charles Slanina, Esquire I have been preaching to all who will listen about
the Court's current focus on attorney books and records and tax
obligations. As previously noted, violations of these SE requirements
may have been viewed as "technical" in the past, but
have now picked up added significance due to the Certificate of
Compliance which requires attorneys to attest that the records
are in compliance and that all taxes have been timely filed and
paid. I have recommended in the strongest possible terms that
all attorneys and firms review their books, records, tax filing
and payments to ensure compliance before the Annual Registration
Statements are filed. I have suggested pre-certifications by a
CPA whenever possible prior to filing of the Certificate of Compliance. Judging from the rash of new disciplinary defense
cases that I am now handling, it is clear that not everyone is
listening. To the extent that you have not found me to
be persuasive, I thought that a review of what the Delaware Supreme
Court has had to say on this subject might be helpful. The Court has consistently held that the failure
to file tax returns violates Rule 8.4 which prohibits certain
criminal acts; conduct involving dishonesty, fraud, deceit or
misrepresentation; and conduct prejudicial to the administration
of justice. A willful failure to timely file a federal income
tax return for one year and state income tax returns for two years
resulted in a three-year suspension. In Re: Tos, Del. Supr., 610 A.2d 1370 (1992).
A willful failure to file tax returns for five years resulted
in a three-year suspension. In Re: Sandbach, Del. Supr., 546 A.2d 345(1988).
A willful failure to file tax returns for three years also resulted
in a three-year suspension. In Re: Sanders, Del. Supr., 498 A.2d
148 (1985). The Court has also been willing to find a failure
to pay income taxes to be willful even when a return was filed.
Despite a claimed inability to pay personal income taxes for four
years, due to economic circumstances, the Court found the failure
to be willful because no payment plan had been entered into with
regard to the state taxes and payments had not been made under
a payment plan to the federal tax authorities. However, the period
of suspension imposed was six months despite a somewhat extensive
prior disciplinary record and multiple other unrelated offenses. In Re: Mekler, Del. Supr., 689 A.2d 1171
(1996). On the other hand, cases in which there was a criminal
prosecution for failure to pay personal taxes have generally resulted
in disbarment. In the matter of Bennethum, Del. Supr., 278
A.2d 831 (1971). The Court's scrutiny does not end at personal
taxes. Payroll withholding taxes are viewed as fiduciary funds
and the failure to timely file and pay those obligations has also
resulted in disciplinary sanctions. Fortunately, because we are
dealing with a "kinder and gentler" IRS, we have not
seen many attorney criminal prosecutions lately and the professional
discipline imposed has been less severe. A failure to file and pay various federal and state
employee and employer payroll taxes for a law practice (along
with some books and record keeping violations) resulted in a public
reprimand and a 2 year public probation." In the matter
of the Member of the Bar, Del. Supr., 774 A.2d 258 (2001).
Federal unemployment tax returns were filed and paid late and
all penalties were paid. Perhaps because the tax authorities were
simply content to receive the payments, the primary focus of the
disciplinary violation was the incorrect Certificate to the Court
that the tax obligations had been timely filed and paid. There
have been a number of very similar cases with similar outcomes.
In most of these cases, the attorney was directly responsible
for the preparation of the returns and the payments. Attorneys who have relied to their detriment on
their staff have on occasion, received a private admonition for
the same violations. My sense is that the Court is sympathetic
to the attorney's need to rely on bookkeepers, office managers
and accountants for these law office functions. However, there
is still an expectation of adequate supervision of support staff.
Attorneys may still find themselves with a Rule 5.3 violation
for failure to adequately supervise non-attorney subordinates
or an Rule 8.4 count for the "false" certification if
the supervision of the employees charged with the tax of filing
or paying the taxes is insufficient to prevent the omissions.
The Court has not, to date, imposed a strict or vicarious liability
on these obligations but there may yet come a set of facts to
tempt them to do so. Santa is checking his list - twice, and I suggest
that you give your Certificate of Compliance the same scrutiny
before signing it. Bonus material More! Happy Holidays!!!
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