Making stupidity work for you

All too frequently I am blessed with tax clients who, because of their egregious actions (or inactions), have become impossible to successfully defend on the merits of their case. I am thus forced to become creative in finding ways to successfully represent these individuals so as to minimize their tax liability or, to be more precise, to minimize their actual cash payout. Many of my fellow attorney-CPAs have clients like these-the non tax filers, the non taxpayers, the clients who might not walk hand-in-hand with the truth, and those who simply find themselves on the wrong side of the tax code or some other regulation. For those clients for whom there is no hope the defense of last resort is the "stupidity defense."

The stupidity defense is the defense of last resort because the chances of success are remote, unless, of course, one redefines the meaning of the word "success." Success in these cases will not be measured by the total exoneration of your client except in the rarest of circumstances, but rather success will be measured by the amelioration of some of the sting associated with the sanctions imposed upon the client. This might involve the removal or reduction of penalties, the removal of fraud penalties (thus allowing the client to possibly discharge some, if not all, of the tax liability in bankruptcy), the possible running of the statute of limitations for collections, or a whole host of other possible compromise or complete solutions. While this may not constitute the same success as winning a case on its merits, the consequences of paying out a reduced amount or paying nothing at all to the Service may be a bigger "success" in your client's eyes. You will have made lemonade from lemons.

The first step in this process, after the proper securing of your employment relationship with the client, is to set the him on the right track. He must acknowledge the error of his ways and sin no more. Naturally, the client has only just learned of the error of his ways through his contact with you. Now that the client walks with the angels, the patina of your goodness leading him to the path of righteousness should inure (hopefully) to the benefit of your client. Incidentally, as an officer of the court, you must put your client on the right track. Anything less could land you in trouble.

The second step is to choose the forum in which you want to present your client and his argument for leniency. There are a whole host of options and they are not at all mutually exclusive. There is the legal system-US District Court, the US Court of Claims, the US Bankruptcy Court (a favorite of mine because it is the last, really great court of equity), possibly the US Tax Court and Court of Common Pleas (a state court which is another favorite forum of mine because this forum really throws the US attorneys for a loop. US attorneys practice extensively before federal, not state, courts and if you can keep a case in your state court you have achieved a decided advantage).

Of course, you might not even choose to pursue your defense in a court setting at all. You may want to plumb the bowels of the Service itself for a solution. Within the kinder and gentler IRS, there is a whole array of options. I'm not fond of the offer in compromise approach because such offers are rarely accepted in my jurisdiction, but many attorney-CPAs have reported otherwise in their areas. Be careful of the tolling of the statute of limitations on collections when reviewing the offer option. There are also new avenues of appeals at the collection level and there is recent innocent spouse legislation, so check these options out as well.

The next step is to determine in which location you wish to mount your defense. Many of us live close to adjoining states affording the practitioner some choice in determining where to file a bankruptcy, where to argue your Tax Court case and, in some cases, where to work within the structure of the IRS itself. A change of residency (which is not really difficult) may not even be required for you to choose where you bring your case. This has proven to be an especially important consideration for me in that some judges no longer appreciate my clients (or, alas, me) as much as I think they should.

Nothing previously discussed has anything to do with the merits of the case. The merits may provide additional avenues for legal mayhem. As an example, I am presently representing a former tax protester in a US Court of Appeals in which a surprising argument has developed. My client believed the US Tax Code did not apply to him for constitutional reasons and I therefore argued his subsequent non-filing of his taxes did not constitute a fraud sufficient to bar the dischargability of his tax obligation in bankruptcy. Regrettably, this argument was not viewed favorably by the US Bankruptcy Court and we lost on summary judgment as a matter of law. On appeal, however, one issue which intrigued the appellate court judges was whether the Bankruptcy Court erred by not allowing the issue of the reasonableness of my client's "stupidity" to go before a jury.

While I am not hopeful as to the ultimate results of this case on its merits, please realize we have already achieved our "success." This case has been going on for over eight years with the Service not yet collecting on my client's alleged tax liability. Additionally, should we win on appeal, this case could drag out another three to four years during which time my client will retire. The Service, assuming I can't make effective statute of limitations arguments on the collection, or win on the merits of the case, will be left with having to collect on my client's monthly pension-a monthly amount presently below a level at which the Service begins to collect its first dollar. Odd financial planning I admit, but a success nonetheless. Please note that we were negotiating with the Service's representatives at every step to achieve a "repayment" amount which my client could afford. Although we could not reach an agreement, think of all the settlement opportunities we were afforded along the way.

The point of this article is to inspire my fellow attorney-CPAs not to surrender the client to the Service's collection process even in the most hopeless of cases. There is always something to be achieved for the client even if the facts and the law are not on your side. Client stupidity or ignorance can be argued as mitigation or sometimes even as an outright defense. There are so many opportunities to negotiate a settlement, so many chances for appeal, so many avenues for "success" to be achieved on behalf of your clients that choosing among them all may be the most difficult task you encounter.

Mark R. McBride

Toledo, Ohio

Author Mark McBride will examine this topic in greater detail at the Northeastern Regional meeting in Wilmington, Delaware January 7-9, 2000.

Copyright American Association of Attorney-Certified Public Accountants 1999
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