Lax records, skipped taxes yield disastrous results
When lawyers talk about “legal ethics,” they can mean either of two quite different things.
Most lawyers, or at least all the lawyers I ever cared to associate with, are alert to possible conflicts between representing the client’s interests and doing what the law requires.
They are scrupulously honest with the courts while scrupulously maintaining their client’s confidences. They treat opposing counsel fairly while giving nothing away.
These and many other competing demands are baked into the practice of law. Being an ethical lawyer in this everyday sense starts with constant awareness of potential conflicts.
Then there’s the Rules of Professional Responsibility, sometimes referred to as the ethics rules — although they might more accurately be described as a catalog of things that can cost lawyers their bar cards.
The Rules don’t come close to defining the whole universe of unethical behavior by lawyers. Instead they specify the few specific forms that might compel the Supreme Court and its Disciplinary Board to act.
The worst form of attorney bad behavior, the one most likely to prompt the Supreme Court to yank a lawyer’s license, is stealing money from a client.
“The presumptive form of discipline for knowingly misappropriating client funds is disbarment.”
That quote is from the New Mexico Supreme Court’s 2019 opinion explaining its disbarment of Jennie Behles, an Albuquerque bankruptcy specialist who practiced law in the state “for nearly 50 years.”
It’s extraordinarily rare for the court to strike a longtime practitioner from the rolls, but it found that Behles had “expended client funds she had been ordered to hold in trust, failed to maintain complete records of her client trust fund account, failed to keep client money separate from her own, and unreasonably charged a contingent fee on the return of her client’s court bond.”
The item in that charge sheet that might seem least serious, the failure to maintain adequate records, became very serious indeed for Behles when the Taxation and Revenue Department began to ask about her law firm’s failure to pay taxes.
According to a Decision and Order issued by a hearing officer on the last day of 2020, the office manager of the Behles law firm, who is also Behles’ husband, “admitted that he had neither reported [the firm’s] gross receipts nor paid associated gross receipts tax since October 2010.” The firm did, however, collect gross receipts taxes from its clients.
The decision continues: “There was similarly no record of [the firm] reporting corporate income or paying associated corporate income tax in any relevant year.”
When the auditors came to call, the firm was unable to provide complete documentation regarding its income over the years. At the hearing on their tax protest, Behles and her husband testified that their janitor “allegedly misunderstood the significance of some bins of documents, and ‘he took them out and he burned them.’”
Although the audit commenced in July 2017, Behles apparently didn’t mention this disaster to the auditors until September 2019. The next year, a burglar broke into the office and stole computers storing other firm records, and took the back-ups, too.
The Decision and Order laconically recites that the hearing officer “regrettably found Taxpayer’s evidence on these incidents to be unreliable and lacking credibility.”
Tax statutes and regulations require companies to keep adequate financial records. When they don’t, the department is empowered to use alternative means to calculate the company’s income.
With the Behles firm, the department examined bank records, which showed deposits of more than $5 million over the time period covered by the audit. The department used that figure as the basis for its calculation of the firm’s total income and consequent tax liability.
The firm was given the chance to prove the department’s calculation incorrect. But carrying that burden would have required documentation, which it couldn’t provide.
Lest anyone be tempted to roll the dice in hopes that the department’s estimate will be less than the true amount of income, the Legislature imposes a 50% penalty for the willful attempt to evade or defeat a tax. Paying gross receipts tax for years, then ceasing to pay it, as the Behles firm did, meets the definition of willfulness.
Altogether, the firm was assessed $663,716 in back taxes, plus $332,388 in penalty (which isn’t exactly 50%, a discrepancy unexplained in the decision), plus interest, which continues to accrue.
The hearing officer denied the firm’s protest, with one small exception. The firm and its auditors agreed to reduce the calculation of its total income by $71,406, which will produce a small downward adjustment in the assessed tax, penalty and interest. But the final bill will still be staggering.
The firm has the right to appeal.