T.C. M em o . 2 0 2 0 -1 7

UNITED STATES TAX COURT

L ON B. ISAACSON, Pet i ti o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 9 4 84 -1 4
. Fi l edJ an uary2 3 , 2 0 2 0
.

J o s ep h A. Bro y l es , fo r p et i t i o n er. Cas s i dy B. Co l l in s , An drea M . Fal d erm ey er, Ch ri st in e A. Fu ku s h i m a, an d Pri s ci l l a A. Parret t , fo r res p on d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION
M ARVEL, Jud g e: Pet i t i o n er s eek s red et erm in at io n o f h i s i n co m e t ax l i ab i l i ty fo r t ax y ear 2 0 0 7. Res p o nd en td et erm i neda d efi ci en cy o f $ 2 ,5 8 3 ,3 7 4 an d- 2
-

[* 2 ] a ci v i l frau d p en al t y

o f $ 1 ,9 3 7 ,5 3 1 u n d er s ect i o n 6 6 6 3
. 1 Aft er co n ces s i o n s , 2 th e rem ai n i n g i s s ues fo r d eci s i o n are wh eth er p et i t i o n er (1 ) fai l edt o rep o rtt ax ab l e i n co m e fo r t ax y ear 2 0 0 7 an d(2 ) i s l i ab l e fo r th e ci v il frau dp en al ty u n d er s ect i o n 6 6 6 3
. Th i s cas e cen t ers o n a $ 1 2 .7 5 m i l li o n s et t l em en tp et i t i o ner s ecu redfo r h is fo rm er cl i en t s wh o were ab u s edb y Cat h o li c cl erg y

wh en th ey

were ch i l dren . Sp eci fi cal l y , th i s cas e tu rn s o n wh eth er p et i t io n er earn eda 6 0 % co n t i n g en cy fee fo r h i s s erv i ces i n 2 0 0 7. Sev eral o t h er t ri bu n al s h av e d eal twi t h co n t ro v ers i es i n v o l v i n g th es e fu n d s o v er t he y ears . Inth o s e p ri o r p ro ceed i ng s p et it i on er
co n si s t en t l y

m ai nt ai n ed , p ro du cedev i d en ce i n s up p o rto f, an d co n v i n cedo t h er tri b u nal s t o accep tas t ru e t hath i s fo rm er cl i en t s were s at i s fi edwi t h h i s s erv i ces as
an at t o rn ey

wh en h e s ecu redth i s s et t l em en t i n 2 00 7 an d t h atth o s e cl i en t s n ev er d i s p u t edh i s ri g ht t o hi s as s ert edfee. No w, h o w ev er, h e as s ert s th ath i s fee was al way s i n d i s p ut e.

1 Un l es s o t h erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e rel ev an tt im e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. So m e d o l l ar am o u n t s are ro u n d edt o th e n eares td o l l ar.

2 Am o n g o t h er co n ces s io n s , p et i t io n er h as co n ced edth ath e u n d ers t at edh i s i n co m e fo r 2 0 08 an d t h atth e res u l t i n g u n derp aym en twas frau du l en t .- 3
-

[* 3 ] FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at ed fact s an dfact s drawn fro m th e s t i p u lat edex h i b i t s are i n co rp o rat edh erei n b y th i s referen ce. Pet i t io n er res i d edi n Cal i fo rn i a wh en h e p et i t i o n edth i s Co u rt . A tri al at t o rn ey

fo r 3 8 y ears , p et it i on er s p eci al i zedi n , am o n g o t h er p ract i ce
areas , t ax frau dl i t i g at i on . OnM ay 1 0 , 2 0 1 3, p et i t i o n er was d i sb arred fo r wi l l fu l l y
v i o l at i n g ru l e 4 -1 0 0 o f t h e Cal ifo rn i a Ru l es o f Pro fes s i o n al Co n du ct(ru l e 4 -1 0 0 ), wh i ch req u i res at to rn ey s t o p l ace cl i en t fu n d s i n to tru s tacco u nt s , i m p o s es v ari o u s
reco rd k eep i n g req u i rem en t s , an db ars at to rn ey s fro m co m m i n g l i ng fu n d s . 3 Befo re h i s d i s b arm en t , h o wev er, p et i t i o n er m ai nt ai n edan act i v e l i t i g at i o n p ract ice t h at i n cl u d edth e rep res en t at i o n o f fo u r i n d i v i du al s wh o h adb een s ex u al l y ab u s edas

3 Th e St at e Bar Co u rt o f Cal i fo rn i a fo u n dth atp et i t i o n er wi l l fu l l y v i o l at ed Cal . R. Pro f’ l Co n du ct 4 -1 0 0 (2 0 0 7 ), kn owi n gl y p ro v i d edfal se t es t i m o n y , an d en g ag edi n act s o f m o ral turp i tu d e. In re Is aacs o n , No s . 0 8 -0 -1 0 6 8 4 , 0 8 -0 -1 3 6 8 7 , Cal . St at e Bar Ct . Unp ub l i s h edOp i n io n , Dec. 6 , 2 0 1 2, at2 , av ai l ab le at h t tp : // m em

b ers .cal b ar.ca.g o v / co u rt Do cs /0 8 -O-1 06 8 4-3 .p d f. Pet i t i o n er was d i s b arred b y

th e Cal i fo rn ia Sup rem e Co u rt aft er t h ree p ri o r s u sp en s i o n s fro m p ract i ce. As co n d i t i o n s o f b ei n g p erm i tt edt o p ract i ce ag ai n, p et i t io n er was req u i redt o co m

p l et e ad d i ti on al et h i cs trai n i ng an den g ag e a co ns u lt an twh o s p eci al i zedi n rev i ewi n g l aw fi rm acco u n t i n g an d acco u n tm an ag em en t. Th i s Co u rt ’ s Co m

m i t t ee o n Ad m i s s i o n s , Eth i cs , an dDi sci p l i n e i s s u edan o rd er t o s h o w cau s e t o p et i t i o n er o n Sep tem b er 1 8 , 2 0 1 3 , as t o wh y

h e s h o u l dn o tb e s i m i l arl y d i s ci pl i n ed . Pet i t io n er res p o n d edo n Oct o ber 1 1, 2 0 13 , t en d eri n g h i s res i g n at i o n fro m th e b ar o f t h e Un i t edSt at es Tax Co urt , wh i ch th e Co urtaccep tedeffect i v e No v em b er 1 9 , 2 0 1 3
.- 4
-

[* 4 ] ch i l dren b y

m em bers o f t h e Cat h o l i c cl erg y (cl erg y l aws u i t ). Sp eci fi cal l y , p et i t i o n er rep res en t edfo u r i n d iv i du al s wh o m h e kn ew p ers o n al l y an d wh o
co n si d eredh i m

t o b e b o th th ei r at t o rn ey

an da t ru s tedfri en d
. I. Pet i t i o ner’ s Cl i en ts an dFee Arran gem en t s Pet i t i o ner’ s cl i en t s i n th e cl erg y l aws u i t were Cl i en t s 1 th ro u g h 4 . Cl i en t s 3
an d 4 are b ro t h ers (Bro t h ers ). 4 Th e reco rdd o es n o t co n t ai n co p i es o f ret ai n er ag reem en t s fo r Cl i en t s 1
an d 2 , b u tth e p art i es s ti p u l at edth atb o t h m en ag reedt o ret ai n p et i t i o n er ata 6 0 %
co n ti n g en cy

fee. Th e reco rd d o es co n t ai n co pi es o f t h e Bro t h ers ’ ret ai ner ag reem en t s . Th e ag reem en t s ’ t erm s are l arg el y i d en t ical an d p ro v i de t h at p et i t i o n er wo u ldrecei ve “ 5 0 % i f t h e cas e s et tl es p ri o r t o 1 2 0 d ay s b efo re t h e fi rs t arb i trat i on o r t ri al d at e, o r 6 0 % o f t h e p res en tv al u e o f al l am o u n t s reco v eredfro m
an y s o u rce, i f t h e cas e s et t l es o r i s ad ju d i cat edo n o r aft er 1 2 0 d ay s b efo re t h e fi rs t
m ed i at i o n , arb i t rat i o n o r t ri al d at e i s s et .” Th e Bro t hers ’ ret ai n er ag reem en t s al s o p ro v id e t h atth ey

wo u ld rei m

b u rs e p et i t i o n er 1 1 0 % o f h i s co s ts an dp u rp o rtt o al l o w p et i t i o n er t o d ep o si tfu n ds h el d fo r t h ei r b en efi ti n a “ no n -IOLTA” (In t eres t
o n Lawy ers ’ Tru s tAcco u n t) acco u n t , wi t h p et i t i o n er ret ai n i n g an y i nt eres t earn ed

4 Th e Co urt h as an on ym i zedth e cl i en ts ’ n am es t o p res erv e t h ei r p ri vacy .- 5
-

[* 5 ] o n am o u n ts h el di n the acco u n t . An y d i s p u t es ari s i n g fro m

th e Bro t h ers ’
co n ti n g en cy

fee ag reem en t s were t o b e s ub m i t t ed t o b i n d i n g arb i t rat i on . In th e co u rs e o f ret ai n i n g p et it i on er, t he Bro t h ers an d Cl i en t2 m ad e cl ear th atth ey d i dn o t wan tan y fu tu re s et t l em en tfu n ds d ep o s i t ed atth e Un i on Ban ko f Swi tzerl an d (UBS) an dth atth ey d idn o twan tp et i t i o n er t o m an ag e t hei r i n v es t m en tact i v i t i es wi t h res p ectt o an y fu tu re s et t l em en tfu n d s. II. Pet i t i o ner’ s In ves tm en tAcco u n tatUBS an d Acco un tAct i v it y Befo re t h e Cl erg y Laws u itCl ien tSet t l em en t Fu n d s W ere Dep o si t edIn t o th e Acco u n t Pet i t i o ner h ad b an k edwi t h UBS s i nce t he m i d -1 9 80 s an drel i edo n t h e fi nan ci al ad v i ce o f Ri ch ard Fran k el , wh o h adwo rk ed i n t h e fi n an ci al i n du s t ry
s i nce 1 9 7 1
. OnDecem

b er 2 1, 2 0 0 6 , p et i t i on er o p en edan acco un tatUBS en d i n g i n 6 1 5 1, wh i ch l at er was ren u m b eredt o en di n 9 6 38 (UBS acco u nt ). On t he d o cu m en t s o p en i n g th e acco un t , p et i t i o n er i n di cat edthatth e acco u nt was fo r a
s o l e p ro p ri et o rs h i p, l is t ed h i m s el f as th e p ri nci p al o ffi cer an db en efi ci al o wn er o f th e acco u n t , an dh an dwro t e th e wo rd“ Tru s t ee” aft er h i s l aw fi rm ’ s ty p edn am e o n th e l i n e l i s t i n g th e acco u n to wn er’ s i n fo rm at i o n . Pet i t i o ner d i dn o t i n d i cat e t h at th i s acco u n twas a cl i en ttru s tacco u n t . When o p en i n g th e acco u n t , p et i t i o n er i n d i cat edth atth e acco u nt ’ s i n v es tm en to b ject i v es were “ cap it al ap p reci at i o n ”, wi th a “ m o d erat e” p ri m ary ri s kp ro fi l e an d an “ ag gres s i v e/ s p ecu l at i v e” s eco n d ary- 6
-

[* 6 ] ri skp ro fi l e. Pet i ti o ner d i dn o ti n d icat e t h atth e s o u rce o f th e acco u n t ’ s fu n d s
wo u l db e cl i en ttru s t fu n d s ; i n st ead , p et it i on er i n d icat edth at t h e s o u rce o f fu n d s
wo u l db e “ i n co m e fro m

th e b u s i n es s / o rg an i zat i on .” In o p en i n g th e acco u n t p et i t i o n er ag reedth atan y d i s p u t e rel at in g t o the UBS acco u n two u l db e s ub m i t t ed t o arb i trat i o n . Aft er p et i ti on er o p en edth e UBS acco u nt , o n e o f M r. Fran k el ’ s p art n ers d i s cu s s edau ct i o n rat e s ecu ri t i es wi t h h i m . 5 Aft er l earn i n g ab ou t t h es e s ecu ri t i es , p et i t i o n er d ep o s i t ed$ 8 0 0 ,0 0 0 i n t o the UBS acco u n t . 6 On Decem b er 2 7, 2 0 0 6 , p et i t i o n er d i rect edUBS t o i n ves tth es e fu n d s i n au ct i o n rat e s ecu ri t ies
. In No v em

b er 2 0 0 7 p et it i o n er t o l dM r. Fran k el th ath e ex pect edt o recei v e a l arg e s u m o f m o n ey

fro m th e s et t l em en to f t h e cl erg y l aws u i t . M r. Fran k el t o l d p et i t i o n er t h atth e m o n ey s h o u ldb e i n v es tedi n l o w-ri s kTreas ury b il l s, b ut p et i t i o n er i n s t eadd irect edth ato n ce d ep o si tedi n th e UBS acco un t , th e s et t l em en t fu n d s were t o b e i n v es t ed i n au ct i on rat e s ecu ri t i es , wh i ch p ro v i d e a h i g h er p o t en t i al retu rn th an Treas u ry b i l l s .

5 Au ct i o n rat e s ecu ri t i es are d eb to r p referred equ i t y s ecu ri t i es wh o s e i n t eres t rat es are p eri o d i cal ly

res etth ro u g h an au ct i o n. 6 Th e reco rdd o es n o t i d en t i fy th e s o u rce o f t h i s $ 80 0 ,0 0 0.- 7
-

[* 7 ] III. Cl erg y

Laws u itSet t l em en tan d Fu n ds M an ag em en t In 2 0 0 7 th e Arch d i o ces e o f Lo s An gel es an do t her cl eri cal o rg an i zat i o n s
en t eredi n t o a g l o b al s et t l em en tu n d er wh i ch t h e p ay o rs ag reedt o p ay ap p ro x i m at el y $ 6 6 0.1 m i l l i o n t o res o l v e t h e cas es o f 5 08 v i ct i m s o f ch i l dh o o d
s ex u al ab u s e b y

Cat h o li c cl erg y . OnJ u l y 1 1 , 2 0 0 7 , as p arto f t h i s g l ob al
s et t l em en t , p et i t i o n er ap p eared atan i n fo rm al s et t l em en tco n feren ce i n th e Sup eri o r Co urto f Cal i fo rn i a o f t h e Co u n t y o f Lo s An g el es (Lo s An g el es Co u n t y Sup eri o r Co urt ) an d secu reda co l l ect i v e s et t l em en to f $ 1 2 .7 5 m il l io n fo r h i s fo u r cl i en ts i n s at i s fact i on o f t hei r p en d i n g cl ai m s. To ap p o rt i o n th is s et tl em en tam o n g the fo u r cl ien t s , p et i t i on er p rep ared d o cu m en t s al l o cat i ng th e fu n d s b efo re at t orn ey ’ s fees were p ai d , as s eto u tb el o w,
acco rd i n g t o th e l ev el o f h arm s u ffered b y

each cl i en t an dt o wh i ch each cl i en t ag reed
. Cl i en t Set tl em en tal l ocat i o n 1 $ 1 ,5 9 0 ,0 0 0 2 1 ,1 5 6 ,9 5 0 3 5 ,7 5 1 ,3 2 9 4 4 ,2 5 1 ,7 2 1 To t al 1 2 ,7 5 0 ,0 0 0- 8
-

[* 8 ] Pet i t i o ner ch arg edCl i en t s 1 an d2 a 6 0 % fee, t o wh ich b o t h m enag reedan d wh i ch th ey

n ev er d i s p u t ed . Pet i t i o n er ch arg edth e Bro t hers a 6 0 % fee as wel l , b ut th e Bro th ers i nfo rm edp et i t i o n er th atth ey d is ag reedth atth i s was th e ap pro p ri at e fee am o un t. In s t ead , th ey fel tth atp et i t i o n er was en t i t l edo n l y t o a 4 0%-5 0 % fee b as edo n th e t i m i n g o f t h e s et t l em en tan dth ei r res p ect i v e ret ai n er ag reem en t s . Th e Bro thers ’ co n cern s , h o wev er, d i dn o t l ead t h em t o arb it rat e a fee d i s p u t e wi t h p et i t i o n er, as t h ei r ret ai n er ag reem en two u l dh av e requ i red . No r d i d p et i t i o n er
co n st ru e t h ei r s t at em en treg ard i n g h i s fee as req u i ri n g h im t o s ub m itth e i s su e t o arb i trat i on . IV. Pet i t i o ner’ s M an ag em en to f t h e UBS Acco u n tAft er Set t l em en tFu n d s W ere Dep o s i t ed Aft er t h e s et t l em en tfu nd s were d ep o s i t edi n th e UBS acco un t , p et i t i o n er treat ed th e acco u n tas if i twere a p ers o n al acco u ntan dn o tan acco u nth el di n tru s t fo r t h e b en efi to f h i s cl i en t s . Fo r ex am p l e, o n Decem

b er 1 2 , 2 0 0 7 , p et i t i o n er h ad
an i m m i n en tan d p ers o n al n eedfo r l iqu i di t y an dd i rect edUBS t o s el l o ff $ 1 .8 5
m i l l io n o f t h e au ct i o n rat e s ecu ri t i es o n Decem b er 1 8 , 2 00 7 , wh i ch UBS d id . Th at
s am e d ay p et i t i o n er ag ai n co n t act ed UBS an ds t at edth ath e n o l o n g er n eed edt o
s h o w l i qu i d i t y an dd i rect ed UBS t o rep urch as e t h e $ 1
. 8 5 m i l l i o n o f s ecu ri t i es ju s t
s o l d
.- 9
-

[* 9 ] Al s o o n Decem

ber 1 8 , 2 0 0 7 , p et i ti o n er em ai l edUBS as k i ng fo r cl ari fi cat io n
o f wh ich au ct i o n rat e s ecu ri t i es were “ p urch as edfo r m y b en efi t ”, th e “ am ou n to f
m y p res en th ol d i n g s , an dth e i nt eres tI h av e earn edt o d at e”. On ce UBS i n fo rm ed h i m o f t h e i n t eres tearn ed , p et i t i o n er au t h o ri zedUBS t o tran s fer $ 5 0 ,0 0 0 o f earn ed i n t eres tt o h i s p ers o n al trai n er an ds o ci al acq u ai nt an ce as a g i ft . Lat er, o n Decem b er 2 7 , 2 0 07 , p et i t i o n er s en tUBS h an dwri t t en i n st ru ct io n s t o t ran s fer $ 6 0 0 ,0 0 0 fro m

th e UBS acco u n ti n t o h i s l aw fi rm ’ s Ban k o f Am eri ca b an k
acco u n t , an dUBS t ran s ferred th e fu n d s t hatd ay . Aft er t h e n ew y ear p et it i o n er co n ti n u edt o u s e an d m an ag e t h e fu n ds i n th e UBS acco u n t . OnJ an u ary 1 1 , 2 0 08 , p et i t i o n er wi t h drew $ 1 0 0 ,0 0 0 fro m the UBS
acco u n t an d d ep o s i t ed t h e m o n ey i n t o h i s l aw fi rm ’ s Ban ko f Am eri ca b an k
acco u n t . OnJ anu ary

2 9 , 2 0 0 8 , p et i t i o n er wi t h drew $ 1 .3 m i l l i o n fro m th e UBS
acco u n t an d d ep o s i t ed t h e m o n ey i n t o an o t h er b an kacco u n th e co n t ro l l edat Cal i fo rn i a Ban k& Tru s t . OnJ an u ary 2 9 , 2 0 0 8 , p et i t i o n er p ai dCl i en t 1 h i s p o rt i o n
o f t h e cl erg y

l aws u i ts et tl em en tfu n d s .- 1 0 -

[* 1 0 ] V. Pet i t i o ner’ s Laws u i tAg ai ns tUBS, Sub s equ en tIn t erp l ead er, an d

Vari o u s Arb i t rat i o n s A. Back g ro u n d In Feb ru ary

2 0 0 8 t h e m ark etfo r au ct io n rat e s ecu ri t ies fro ze. Th i s m ark et fai l u re was b u to n e p art o f t h e l arg er fi n an ci al cri s i s o f 2 0 08 . As an i n t ern at i o n al b an k, UBS faced s i g ni fi can tex p o s u re rel at i n g t o , am o n g o t h er l i nes o f b u s i n es s , i t s ro l e i n th e co ll ap s e o f th e au ct i o n rat e s ecu ri t i es m ark et . By M arch 2 0 0 8 th e Secu ri t i es an dEx ch an ge Co m m i s s i o n (SEC) h ads t art edex am i n i n g m an y b ro k erd eal er fi rm s , i n cl u d in g UBS. To h el p m an ag e an d res ol v e i t s p o t en t i al ex p o s u re ari s in g fro m

th e au ct i o n rat e s ecu ri t i es m ark et , UBS ret ai n edHo wardPri v et t e II o f Pau l Has ti n g s . Aft er rev i ewi n g p et i ti o n er’ s act i v i t y reg ard i ng th e UBS acco u n t , M r. Pri v et t e g rew co n cern edthatthe UBS acco u n twas n o ta v al i dcl i en t tru s t acco u n t
u n d er Cal i fo rn i a l aw an dth erefo re p o s ed a ri s kt o UBS b ecau s e th e fu n d s h el d th erei n co u l d b e s ub

jectt o u n kn o wno wn ers h i p i nt eres t s. Acco rd in g l y , o n M arch 1 0 , 2 0 0 8 , UBS p l aced a l eg al h o l do n th e UBS acco u n t . Beg i n n in g o n Ap ri l 4 , 2 0 0 8 , p et i t i o n er s en t M r. Pri v et t e a s eri es o f l et t ers req u es t i ng th atth e fu n d s i n the UBS acco un t b e u n fro zen an drel eas ed i n t o h i s
cu s t o dy . Inth es e l et t ers , p et i t i o n er s t at ed t h atth e UBS acco u n th el d fu n d s o wn ed- 1 1 -

[* 1 1 ] b y h i s l aw fi rm

(i .e., th e fees p et i t i o ner earn edo n th e s et t l em en tfu n d s ) as wel l as fu n d s b el o n g i n g t o h i s cl i en ts (i .e., th e fu n d s al l o cat edt o each cl i en tl es s p et i t i o n er’ s l eg al fee). In s up p o rt , p et i t i o n er at t ach ed s w o rn d ecl arat i on s (wh i ch p et i t i o n er h addraft ed ) s i g n edb y Cl i en t s 2 , 3 , 4 , an d h i m s el f, each o f wh i ch s t at ed th atth e cl i en ts were s at i s fi ed wi t h p et i t i o n er’ s rep res en t at i o n o f t hem i n th e cl erg y l aws u i tcas e. 7 Becau s e p et it i o n er h ad , i n h i s wo rd s , “pro v en th atth e fu n d s an d
as s et s i n * * * [t h e UBS acco u n t ] b el o ng i n g t o * * * [h i s ] three cl i en ts * * * h av e b een id en t i fi edan dquan t i fi ed b y th em u nd er p en al t y

o f p erjury ”, p et i t i o n er
m ai n t ai n edth at t h e l eg al h o l ds h o u l db e l i ft edfro m th e acco u n t . OnAp ri l 1 6 , 2 0 0 8 , o n th e s t ren g t h o f t h es e d ecl arat io n s , M r. Pri v et t e i n fo rm edp et i t i o ner t h at UBS h adl i ft edth e l eg al h o l d o n th e acco un t . B. Th e UBS Laws u i t OnJ u ne 1 3 , 2 00 8 , p et i t i o n er, Cl i en t 2 , an d t h e Bro t h ers ret ai n ed Co t ch et t , Pi tre & M cCart h y

(Co t ch et tfi rm ) t o rep res en tth em i n a l aws u i tt o b e fi l edag ai n st UBS rel at i n g t o t h e cl erg y l aws u i ts et t lem en t fu nd s , th e UBS acco un t , an dth e i l li qu i d i ty o f t h e au ct io n rat e s ecu ri t i es m ark et . Pet i ti o n er an d h is cl i en t s ag reedt o p ay th e Co t ch et tfi rm

1 5 % o f t h e n etam o u nt s reco v eredup t o $ 1 1 .5 7 5 m i l l i o n an d 1 7 % o f t h e n etam o u nt s reco v ered ab o ve t h atam o u n t . Ad d it i o n al l y , p et i ti o n er an d

7 No n e o f t h e d ecl arat io n s m en t i o n edan y fee d i s p u t e.- 1 2 -

[* 1 2 ] h i s cl i en t s ag reedth atan y fee d i s pu t e b et ween them an d t h e Co t ch et tfi rm
wo u l db e s ub m i t t edt o arb i trat i o n . OnJ u ne 1 9 , 2 00 8 , o n b eh al f o f p et it i on er an dh i s cl ien t s, the Co t ch et tfi rm fi led a co m

p l ai n twi t h th e Lo s An g el es Co u n t y Sup eri o r Co u rt ag ai ns tUBS, M r. Fran k el , v ari o us o t h er UBS em p l o y ees , an dM r. Pri v et t e. Ati t s co re th e co m p l ai n t al l eg edth atUBS h adi n v es t edth e cl erg y l aws u i ts et t l em en tfu n d s i n au ct i o n rat e
s ecu ri t i es wi t h ou tp et i t i o ner’ s au t h o ri zat i o n , res u l t i n g i n th e fu n d s ’ b eco m i n g
u n av ai l ab l e t o p et i t io n er an d h i s cl i en t s du ri n g th e ev en tu al freeze o f th e au ct i o n rat e s ecu ri t i es m ark et . 8 In res p o n s e, o n Aug u s t 6 , 2 0 0 8 , UBS an d t h e o t h er n am edd efen d an t s fi l eda jo i n t pet i t i o n t o co m

p el arb i t rat i o n o f t h e cl ai m s u n d erl y in g th e co m p l ai n t , i n
acco rd an ce wi t h the t erm s o f th e UBS acco un t ’ s creat i on . Onth e s am e d ay , M r. Pri v et t e fi l eda m o t i o n t o s t ri k e h i m s el f as a d efen d an ti n the UBS l aws u i t . Al l th e wh i le, t h e SEC h adco n ti n uedi t s i n ves t i g at i o n i nt o UBS an dth e fai l u re o f the au ct i on rat e s ecu ri t i es m ark et . Th at i n v es t i g at io n res u l t edi n a p rel i m i narys et t l em en tag reem en t , reach edo n Au g u s t1 1 , 2 0 0 8, wh i ch req u i red UBS t o b u y

b ackal l i l l i qu i dau ct i o n rat e s ecu ri t i es an dt o en t er i n to arb i t rat i o n

8 In m ak i n g th i s al l eg at i o n , th e co m pl ai n td et ai l edp et i t i o n er’ s rep res en t at i o n o f h i s cl ien t s an dth e cl erg y l aws u i ts et t l em en tb u t m ad e n o m en t i o n o f an y p ri o r o r o n go i n g fee d i sp u te b et ween p et i t i o n er an dh i s cl i en t s .- 1 3 -

[* 1 3 ] p ro ceed i n g s wi t h t h o se UBS cu s t o m ers --s u ch as p et i t i o n er--wh o cl ai m edt o h av e s uffered co n s equ en t i al d am ag es . In res p o n s e t o M r. Pri vet t e’ s m o t i o n t o s t ri k e, p et i t i o n er o n Au g u s t2 5 , 2 0 0 8 , fi leda d ecl arat i o n i n o p p o s i t i o n . Inth atd ecl arat i on , p et i t i o n er s t at ed , am on g o th er t h i n gs , th ath e s o u g h tl i qu id i t y i n t h e UBS acco u n ts o h e co u l d d i s tri b u t e t o h i s cl i en t s the am ou n t s each was en t i tl edt o acco rd i n g t o the
s et t l em en tal l o cat i o n an dp et i t io n er’ s fee s t ru ctu re as s eto u tab o v e. Pet it i on er’ s d ecl arat io n d i dn o tm en t i o n an y fee d i s p ut e wi th an y

o f h i s cl i en t s . In acco rd an ce wi t h th e s et t l em en t ag reem en twi t h t h e SEC, UBS s en t p et i t i o n er a l et t er o n Oct o ber 8 , 2 0 0 8, o fferi n g t o p u rch as e t h e au ct i o n rat e
s ecu ri t i es h el di n h i s acco u n t atp ar v al u e. 9 Pet i ti o n er accep t edth i s o ffer. On J an u ary 5 , 2 0 0 9 , UBS rep u rch as edth e au ct i o n rat e s ecu ri ti es h el d i n th e UBS

9 By th i s p oi n t , h o wev er, t h e rel at i on s hi p b etween p et i ti o n er an d t h e Co t ch et t fi rm ap p ears t o h av e b ro k en d o wn . Th o u g h th e reco rdd o es n o tp ro v id e u s wi th a co m p reh en s i v e v i ew o f wh at o ccu rred , i tap pears t h atat t o rn ey s atth e Co t ch et t fi rm g rew co ncern edwi th p et i ti o n er’ s co ndu ct reg ard i ng th e cl erg y l aws u i t s et t l em en tan dco nv ey edth ei r co n cern s ab o u tp et i t i o n er t o h i s cl erg y l aws u i t cl i en ts . Inres po n s e t o th e Co t ch et tfi rm ’ s d i s cu s si o n s , p et i t io n er t o o kact i o n . Th e reco rdd o es n o tm ak e cl ear wh atex act l y h e s ai dt o the Bro t h ers , b uti t i s cl ear t h at b y Oct o ber 1 6 , 2 0 0 8 , p et i t i o n er h adco n v i n cedth em t o d i s m i s s th e Co t ch et tfi rm an d co n s en t t o p et i t i on er’ s s ub s t i tu t i n g as th ei r co u n s el g o i ng fo rward . Pet i t i o n er was n otab le t o s i m i l arl y

s ecu re co n s en tfro m

Cl i en t2 , wh o m t he Co t ch et t fi rm co n ti n u edt o rep res en t . To s ecu re i t s i n t eres ti n fees earn edrel at edt o p et i ti o n er an d th e Bro t h ers , th e Co t ch et t fi rm fi l ed a l i en o n Oct o b er 2 5 , 2 0 0 8, rel at i n g t o i t s cl ai m edat to rn ey ’ s fees
.- 1 4 -

[* 1 4 ] acco u n t --t h ereb y

res t ori ng l i qui d i t y t o t h e acco u nth o ld i n g th e cl erg y l aws u i t
s et t l em en tfu n d s. Onthe s am e d ay , p et it i on er wro t e t o UBS req u es t in g th atUBS i s su e ch eck s t o t al i n g $ 3 ,3 5 8,7 1 1 .8 5 t o t h e Bro th ers an dt o t he Es t at e o f Cl i en t2 1 0 fo r $ 1 ,6 43 , 6 05 .4 9 (Cl i en t3 ), $ 1 ,2 7 0 ,5 6 2
. 9 1 (Cl i en t4 ), an d$ 4 4 4,5 4 3 .4 5 (Es t at e o f Cl i en t2 ). UBS res p o n d edt o p et i t i o n er’ s req u es tth e n ex t d ay , ex p l ai n i n g t h at b ecau s e o f t h e Co t ch et tfi rm l i en , UBS co u l dn o td i s b u rs e an y fu n d s. Th e fu n d s , i n s t ead , were i n t erp l ead edt o t h e Lo s An g el es Co u nt y Sup eri o r Co u rts o th atth e
v ari o u s o wn ers hi p i n t eres t s co ul db e ad ju d i cat ed
. C. Th e In t erp l ead er an dCo t ch et tFi rm Fee Di s p u t e Arb i t rat io n Befo re UBS i n t erp l ead edth e s et t l em en tfu n d s wi t h th e Lo s An g el es Co u n t y Sup eri o r Co urt , p et i t i o n er s u cces s fu l l y n eg o t iat eda s ti p u l at i o n an do rd er fo r p art i al rel eas e o f fu n ds fro m h i s cl erg y

l aws u i t cl i en t s an dth e Co t ch et tfi rm th at
au th o ri zedUBS t o d i s b u rs e cert ai n am o u n t s t o p et i t i o n er t h at were n o ts ub jectt o th e Co t ch et tfi rm ’ s l i en . OnJ an u ary 1 3, 2 0 0 9 , th e Lo s An g el es Co un t y Sup eri or Co u rtaccep t edth e s t i p u lat i o n an do rd eredUBS t o d i s b u rs e th e fu n d s i n
acco rd an ce wi t h the s t i p u l at i o n , wh i ch i td i do n J an u ary 1 5 , 2 0 0 9
. OnM arch 5 , 2 00 9 , th e Lo s An g el es Co u n t y Sup eri o r Co urth el da h eari n g
o n UBS’ m o t i o n s t o in t erp l ead fu n d s an dco m p el arb i t rat i on o f t h e u n d erl y i n g

1 0 Cl i en t2 d i ed o n Oct o b er 2 1 , 2 0 0 8.- 1 5 -

[* 1 5 ] d i s p u t e. Atth i s h eari n g , p et i t io n er s t at edo n t h e reco rdth at t here was n o fee d i s p u t e b et ween h i m sel f an dh is cl erg y l aws u i tcl i en t s , rel y i n g up o n t h e d ecl arat io n s h e h ad p rep aredan dwh i ch h i s cl erg y l aws u itcl i en ts h ads i g n edth at
s t at edth ateach was s at i s fi ed wi t h h i s s erv i ces reg ard i n g th e cl erg y l aws u i t
s et t l em en t . Th e Lo s An gel es Co u n t y Sup eri o r Co u rtg ran t edUBS’ m o t i o n t o i n t erp l eadth e rem ai n i n g $ 8 ,2 8 1 ,1 4 0 h el d i n th e UBS acco u n tan dal s o g ran t ed UBS’ m o t i o n t o co m

pel arb i trat i o n o f t he d i s p u t e rel at i n g t o th e UBS acco un t . On ce t h e fu n d s were i n t erp l ead ed , th e Co t ch et tfi rm fi leda cl ai m

t o th e i n t erp l ead edfu n d s , up t o $ 1 ,3 9 8 ,0 9 3 , o n t h e b as i s o f t h ei r wo rki n rep res en t i n g p et i t i o n er an dh is cl i en t s b efo re i t s d i s m is s al as co u n s el . Aft er a co n feren ce cal l h eari n g , th e Lo s An g el es Co u n t y Sup eri o r Co u rt o rd eredthatth e i n t erp l ead ed fu n d s i n ex ces s o f the Co t ch et t fi rm ’ s cl ai m ($ 6 ,8 8 3 ,0 47 ) b e d is bu rs ed t o p et i t i o n er. OnJ u ne 1 0 , 2 00 9 , p et i t i o n er an dth e Co tch et t fi rm arb i trat edth ei r d i s p u t e. In th at p ro ceed i n g , p et it i o n er d i dn o t s t at e t h at a fee d is p u t e ex i s t edb et ween h i m s el f an dan y

o f h i s cl i en t s; h e co n t en d ed i n s t eadth ath i s cl i en t s were s at i s fi ed wi th h is s erv ices an d p ro v i d edh i s cl i en t s ’ d ecl arat i o n s t o t h ateffect . OnAu g u s t 2 1 , 2 0 0 9 , the arb i trat or i s su edh i s reco m m en dedawardan dfi n d i n g s rel at i n g t o th e d i s p u t e b et ween p et i t i o n er an dth e Bro t h ers ag ai n s t th e Co t ch et tfi rm . Am o n g- 1 6 -

[* 1 6 ] o th er t h i n gs , th e arb i t rat o r d et erm i n edth at“ [n ] o n e o f * * * [p et i t io n er’ s ] cl i en ts ev er ch al l en gedo r ev en qu es t i o n edan y ri g h to r am o u n to f at to rn ey ’ s fees ch arg ed by

o r p ai dt o * * * [p et i t i o n er] i n co n nect i on wi t h th e s ex u al ab us e l i ti g at i o n .” Onth e s t ren g t h o f t h at d et erm i n at i o n as wel l as o t h ers n o t rel ev an th ere, t h e arb i trat o r reco m

m en d ed t h at t h e Lo s An g el es Co u n t y Sup eri o r Co u rt d i s b u rs e t h e
rem ai n i n g i n t erp l ead edfu n d s (t h en $ 1 ,3 9 8,0 9 3 p l u s accru edi nt eres t ), wi t h $ 5 4 6 ,0 0 0 t o th e Co t ch et tfi rm an d t h e b al an ce p ai dt o p et i t i o n er i n tru stfo r h i m s el f
an d th e Bro t h ers . Th e Lo s An g el es Co u n t y Sup eri o r Co u rtad o p t edth e fi n d i n g s
an d reco m

m en dat i o n o f t h e arb i t rat o r’ s award , an d , o n Oct ob er 2 7 , 2 0 0 9 , o rd ered th atth e i n t erp l ead edfu n d s b e d i s b urs edt o p et it i on er i n t o t al , fro m wh i ch th e Lo s An g el es Co u n ty

Sup eri o r Co u rto rd eredp et i t i o n er t o p ay the Co tch et t fi rm $ 5 4 6 ,0 0 0
. D. Th e UBS-FINRA Arb i t rat i o n an dSubs equ en tLo s An g el es Co u n t y Sup eri o r Co u rtRu l i n g Al th ou g h the d i sp u te reg ard i n g t he al lo cat i on o f t h e cl erg y l aws u i t
s et t l em en tfu n d s am o n g p et i t i o n er, t h e Bro t hers , an d t h e Co tch et tfi rm was
res o l vedi n 2 00 9 , th e s ubs t an t i v e s ecu ri t i es l aw cl ai m s p et i t i o n er an dh i s cl i en t s- 1 7 -

[* 1 7 ] al l eg edag ai n stUBS rem ai n edi n d i s p ut e. 1 1 In t h e l ig hto f UBS’ m o t i o n t o
co m p el arb i t rat i on o f thes e cl ai m s d i s cu s s edab o v e, p et it io n er o n No v em b er 2 5 , 2 0 0 9 , fi leda s t at em en to f cl ai m fo r rel i ef wi t h t h e Fi n an ci al In du s t ry Reg u l at o ry Au tho ri ty (FINRA) t o arb i t rat e t h e cl ai m s . Th e s t at em en to f cl ai m al l eg ed v ari o u s cl ai m s ag ai n s tUBS, wi t h th e m o s trel ev an tb ei n g th atUBS h adi n v es t edth e cl erg y l aws u i ts et t l em en tfu nd s i n au ct i o n rat e s ecu ri t i es wi t h ou tp et it i o n er’ s co n s en to r d i rect i o n . Du ri n g th e co u rs e o f t h e FINRA arb i t rat i o n , UBS s o u g h t , an dth e arb i t rat i o n
co m m i t t ee co m

p el ledp ro du ct i o n o f, p et i t i o n er’ s i n co m e t ax retu rn s fo r t ax y ears 2 0 0 4 thro u g h 2 0 0 9 . Aft er d i s p u t i n g th e rel ev an cy o f t h es e d o cu m en ts , p et i t i o n er
ev en tu al l y

p ro duced wh ath e s ai dwere h i s i n co m e t ax retu rn s , i ncl u d i n g a p u rp ort edco p y

o f h i s t ax return fo r t ax y ear 2 0 0 9 . Th i s p u rp o rt edco p y was n o t th e s am e as the i n co m e t ax retu rn p et i t i o n er act u al l y fi l edwi t h th e IRS fo r 2 0 0 9
. Aft er m u ch b ackan dfo rt h i n th e FINRA arb i t rat i o n , th e p art i es ag reedt o
s et t l e al l s ub s t an t i v e cl ai m s as s ert edi n the UBS l aws u i t (an d d eri vat i v el y th e

1 1 Th e i n t erp l ead er an d t h e Co tch et tfi rm arb i t rat i o n s temm edfro m th e d i s p u t e ab o u tfees ari s i n g fro m th e l aws u i tag ai n s t UBS an dwas co m pel l edb y th e t erm s o f t h e Co t ch et tfi rm ’ s ret ai n er ag reem en t . Th e UBS-FINRA arb i trat i o n s t em m ed fro m th e s ub s t an t iv e cl ai m s b ro ug h t o n p et i ti o n er an dh is cl i en t s ’ b eh al f b y th e Co t ch et tfi rm

i n th e UBS l aws u i t , an darb i t rat i o n was co m pel l edb y th e t erm s o f p et it i o n er’ s i n v es t m en tb ro kerag e acco un tp ap erwo rk , wh i ch h e ex ecu t ed wh en h e o p en edth e acco u n twi t h UBS.- 1 8 -

[* 1 8 ] res u l t i n g FINRA arb i t rat i o n ) b y Decem b er 3 0 , 2 01 0
. Inex ch an g e fo r a g en eral rel eas e, UBS ag reedt o p ay p et i t i on er an dthe Bro t h ers a t o t al o f $ 9 5 0 ,0 00
. Acco rd in g ly , th e UBS l aws u i twas d i s m is s ed b y th e Lo s An g el es Co u nt y

Sup eri o r Co u rto n M arch 2 , 2 0 1 1
. On ce a FINRA arb i t rat i on i s o p en ed , th e fi n an ci al i n du s t ry p ro fes s i o n al s i n v o l v ed wi ll h av e t h e m at ter reco rd ed o n t h ei r fi l es wi t h in FINRA’ s Cen t ral Reg is trat i o n Dep o s i t ory . Becau s e a reco rdo f a cl i en t d i s p ut e o r arb it rat i o n can h av e n eg at i v e co ns equ en ces fo r fi n an ci al i n du s try p ro fes s io n al s , th e v ari o u s d efen d an t s i n th e UBS l aws u i tan dth e FINRA arb i trat i o n s o u gh tt o h av e t h e
reco rdo f t h e cas e ex pu n g edfro m th ei r FINRA reco rd s . Th e FINRA arb i t rat i o n p an el ex pu n g edth e reco rd s o f m o s td efen d an t s , b u t reco m m en dedth atM r. Fran k el ’ s an da M r. Pat t ’ s (an o t h er o f t he d efen d an t s i n t h e UBS l aws u i t ) reco rd s b e m ai n tai n edb ecau se t h e UBS acco u n t s h o u l dh av e b een o p en edas an at t o rn ey cl i en t tru s tacco u n t --n o tas t h e i n v es t m en tb ro k erag e acco u n tth atth ey h adal l o wed p et i t i o n er t o o p en i n st ead
. M r. Fran k el an dM r. Pat tth en fi leda m o t i o n wi t h th e Lo s An gel es Co u n t y Sup eri o r Co urtt o v acat e t h e arb i t rat i o n co m m it t ee’ s fi n d i ng an dt o ex p un g e t h ei r
reco rd s . InJ an u ary

2 0 1 2 t h e Lo s An g el es Co u n t y Sup eri o r Co urti s s u edi t s o rd er
an d ju d g m en t th atM r. Fran k el ’ s an dM r. Pat t ’ s reco rd s wi t h FINRA b e ex p u n g ed
.- 1 9 -

[* 1 9 ] In d o i n g s o , th e Lo s An g el es Co u n t y Sup eri o r Co u rtco ncl u d edth at p et i t i o n er’ s co nt en t i o n th at UBS h adi n v es t edth e cl erg y l aws u i ts et t l em en tfu n d s wi th o u th i s au t h o ri zat io n was “ fal se” an d“ cl earl y erro neo u s .” Th e co urtfo u n d th at“ th e ev i d en ce p res en t ed * * * es tab l i sh es th atth e fu n d s were i n v es t ed at* * * [p et i ti o n er’ s ] d i rect i o n , fo l l owi n g d et ai l ed co n v ers at i o n s wi t h h i m co n cern i n g th e i n v es t m en t s .” W i t h th i s o rd er, t he wi n d i n g p at h o f l aws u i t , i n t erp l ead er, arb i trat i o n, an d
ex p un g em en tp ro ceed i n g s t h ats t emm edfro m th e cl erg y

l aws u i ts et t l em en ten d ed
. VI. Pet i t i o ner’ s Fi nan ci al Reco rd s , In co m e Tax Rep o rt i n g , an dEx am i n at i o n Pet i t i o ner’ s fi n an ci al reco rd s an dh i s s t at em en t s reg ard i n g h i s fi n an ci al p o s i t i on i n t h e y ears s u rro u n di n g th e cl erg y l aws u i ts et t l em en tare n o tal way s
co n si s t en t . A. Pet i t i o ner’ s Tax Rep o rt i n g fo r 2 0 0 5 , 2 0 0 6 , an d2 0 0 8 Pet i t i o ner rep o rt edn etp ro fi t s fro m h i s l aw p ract i ce o f $ 3 3 , 2 0 3 o n Sch edu l e C, Pro fi to r Lo ss Fro m

Bu s i n es s , o f h i s 2 0 0 5 Fo rm 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn . When p et i t i o n er o p en edth e UBS acco u n t, h owev er, h e rep res en t edt o UBS t h ath i s l aw p ract i ce g en erat edn etp ro fi ts i n 2 0 05 o f $ 7 5,2 12
.- 2 0 -

[* 2 0 ] In 2 0 0 6 p et i t i o n er s et t l edcas es fo r v ari o u s cl i en t s res u l t i n g i n t o t al l eg al fees recei v edo f $ 8 1 3 ,0 0 0 , wh i ch h e rep o rt edo n h is 2 0 0 6 Fo rm 1 0 4 0 , n o tas i n co m e b u tas l i ab i l i t i es fo r cl i en tret ai n ers . Fo r 2 0 0 8 p et it i o n er co n ced es h e frau du l en tl y fai l edt o rep o rta $ 1 4 0 ,0 0 0 l eg al fee h e earn edi n 2 0 0 8 an d t h ath e o v ers t at ed v ari o u s d edu ct i o ns b y a t o t al o f $ 8 3 1 ,1 5 4 o n h i s 2 0 08 Fo rm 1 04 0
. B. Pet i t i o ner’ s Bo o k s an dTax Retu rn Prep arat i o n fo r 2 0 0 7 In 2 0 0 7 p et i t i o n er m ai n t ai n edh i s fi n an ci al reco rd s i n Qu i ck Bo o k s . W i t h in Qu i ck Bo o k s h e m ai n tai n ed t h ree l ed g ers , two o f wh i ch are rel ev an th ere: 1 2 (1 ) t h e Lo n B. Is aacs o n & As s o ci at es l ed g er, i n wh i ch h e acco u n tedfo r t h e b u s i n es s
acco u n t s o f h i s l aw p ract i ce; an d(2 ) t h e Lo n B. Is aacs o n Tru s t & In v es t m en t Acco u n t s l ed g er, i n wh i ch h e acco u n t edfo r h i s at t o rn ey -cl i en t tru s tacco u n t s as wel l as v ari o u s i n ves tm en tacco u n t s . Pet i t io n er d i dn o ti n cl u d e t h e UBS acco u n t i n ei th er l ed g er. To p rep are h i s 2 0 0 7 i n co m e t ax return , p et i t i o n er ret ai n edPat ri ck Kari s , C.P.A. Pet i t i o n er wen tt o M r. Kari s ’ o ffi ce an dp ro v id edM r. Kari s wi t h h i s

1 2 Th e t h i rdl ed g er was th e Lo n B. Is aacs on Real t y , Lt d ., l ed g er, i n wh i ch h e acco u n t edfo r v ari o u s real es tat e ren t al act i vi t y .- 2 1 -

[* 2 1 ] Qu i ck Bo o k s l ed g ers , wh i ch d i dn o tacco u n t fo r t h e UBS acco un t , t o p rep are h i s 2 0 0 7 i n co m e t ax return . Pet i t i o ner al s o fai l edt o t el l M r. Kari s o f t h e ex i s t en ce o f t h e UBS acco u nt . In s t ead , p et i t io n er h ada l eg al as s i s t an tath i s l aw fi rm drafta m em o ran du m

(wh i ch p et i t i o n er rep res en t edt o b e a t ax o p i ni o n l et t er) ad vi s i n g thatfu n d s h el di n a cl i en t tru s tacco u n two u l dn o trep res en t i n co m e. 1 3 OnOct ob er 6 , 2 0 0 8 , th e l eg al
as s i s tan t p ro v i dedp et i t i o n er t h e fo u r-p ag e m em o ran du m t i t led“ TAX PROBLEM / CONSTRUCTIVE RECEIPT”. Th e m em o ran du m p u rp ort s t o p ro vi d e “ au t h o ri t y
s up p ort i n g o u r p o s it i on th ato u r cl i en t , t ax p ay er, i s n o tres p o n s i b le t o rep ort i n co m e h e n ev er actual l y o r co n s t ru ct i v el y

recei v ed .” Th is m em oran du m d o es n o t i d en t i fy p et i ti o n er as th e h y

p o th et i cal t ax p ay er-cl i en t . Wh i le i tp ro v i d es a cu rs o ry
s u m m at i on o f t h e l aw o f co n s t ru ct i v e recei p t , i trarel y d eal s wi t h s p eci fi c fact s . Th e m em o ran du m

as s u m es t h atth e t ax p ay er-cl i en t d ep o s it edfu n d s wi th a
cu s t o d i an an dth atth e cu s t o d i an “ wi t h o u tau t h o ri zat i o n fro m , o r n o t i ce t o t h e t ax p ay er rem o vedthe fu n d s * * * [an d ] i n ves t edth e co m p en s at i o n wi t h o utth e t ax p ay er’ s kn o wl ed g e, n o ti ce, o r acq u i es cen ce.” Becau s e t h e cu s t od i an t o o k p o s s es s i o n o f an dco nv ert edth e fu n d s wi t h o u t au th o ri zat i o n , th e m em o ran du m

1 3 Th atem p lo y ee h adg radu at edfro m l aw s ch o o l (wh ere h e h adt ak en an i n tro du ct o ry

Fed eral i n co m e t ax cl as s ) b u t h adn o t y etp as s edth e b ar.- 2 2 -

[* 2 2 ] co ncl u d es th atth e fu n d s n eedn o tb e rep o rt edas i n co m e b y th e t ax p ay ercl i en t u n d er t h e d o ct ri n e o f co ns t ru ct i ve recei p t . Al l eg ed l y rel y i n g o n h is l eg al as s i s t an t ’ s m em oran du m , p et i ti o n er d i dn o t t el l M r. Kari s ab o u th i s recei p t o f t h e cl erg y l aws u i ts et t l em en tfu n d s , n o r d i dh e rep o rtan y

l eg al fees earn edfro m

th e cl erg y

l aws ui ts et t l em en tas i nco m e o n h i s 2 0 0 7 i nco m e t ax retu rn . OnNo v em b er 1 7 , 2 0 08 , p et i t i o n er fi l edh is i n co m e t ax retu rn fo r 2 0 0 7
. C. Ex am i n at i o n o f Pet i t i on er’ s 2 0 0 7 Tax Retu rn Pet i t i o ner’ s 2 0 0 7 i n co m e t ax return was s el ect edfo r ex am in at i o n . Co n s i s t en twi t h th e p o s it i on h e h adt ak en b efo re h e fi l edh i s 2 0 0 7 i n co m e t ax retu rn , p et i t i o n er i n s i s t edth ro u g h o u tth e ex am i n at i on th at t h e fu nd s d eri v edfro m th e cl erg y l aws u i ts et t lem en td idn o tco n st i tu t e i nco m e b ecau s e UBS h adi n v es t ed th e fu n d s wi t h o uth i s au t h o ri zat i o n . OnAu g u s t5 , 2 0 13 , fo r i ns t an ce, p et i t i o n er
em ai l edh i s au t h o ri zedrep res en t at i v e a co p y o f h i s l eg al as s is tan t ’ s 2 0 0 8
m em o ran du m . Inth atem ai l p et i t i o n er rep eat ed l y t o l d h i s au t h o ri zed rep res en t at i v e th atUBS “ st o le” t h e fu n d s h el di n t he UBS acco u n tan d i n v es t ed th em wi th o u th i s au t h o ri zat i o n . Pet i t i o n er d i d n o tm en t i o n th at t h e Lo s An g el es Co u n ty Sup eri o r Co u rth add eci d edm o re t h an a y ear b efo re t h atthi s s t o ry was- 2 3 -

[* 2 3 ] fal s e. Nei t h er d i dp et i t i o n er m en t i o n an y al leg edfee d i s p u t e wi t h h i s fo rm er cl i en ts . OnOct o b er 1 5 , 2 01 4 , th e Co m m i s s i o ner i ss u ed t o p et i ti o n er a n o t ice o f d efi ci en cy

d et erm i n i n g a d efi ci en cy an d a frau d p en al t y fo r t ax y ear 2 0 0 7 , fro m wh i ch p et i t i on er t i m el y

p et i t i o n edth i s Co u rt . A tri al i n t h i s cas e was h el d b efo re J u d g e Wherry o n M ay

5 , 2 0 1 6 . OnJ an u ary

1 , 2 0 18 , J u d g e Wh erry ret iredfro m ju d i ci al s erv ice. Th e Co u rtth eni s s uedan o rd er as k i n g th e p art i es t o co n s en to r
o b jectt o th e reas s i g n m en t o f t h i s cas e t o an o t h er ju d i ci al o ffi cer “ fo r p u rp o s es o f p rep ari n g th e o p i n i on an den teri n g th e d eci s i on b as edo n the reco rdo f t ri al p rev i o u s l y h el d”. Bo t h p art i es co n s en t edt o reas s i g nm en to f t h e cas e, an dth e cas e
was reas s i g n edt o J u d g e M arv el o n M ay 2 3 , 2 0 1 8
. OnJ u n e 1 1 , 2 0 1 9 , th i s Co u rt h el da s up p l em en tal tri al reg ard i n g wh et h er res p o n den tco m p li edwi t h th e wri t ten
s up erv i s o ry

ap p ro v al req u i rem en t s u nd er s ect io n 6 75 1 (b ) wi th res p ect t o th e d et erm i n eds ect io n 6 66 3 ci vi l frau dp en al ty . Atth e s upp l em en t al t ri al , res p o n d en t i n tro du ceda Ci v i l Pen al ty Ap pro v al Fo rm , s ig nedb y St ep h en Lep ore an d d at ed Au g u s t2 8 , 2 0 1 4 . M r. Lep o re s up erv i s edRev en u e Ag en tBern ardTrap p ’ s
ex am i n at i o n o f p et i t i o n er’ s retu rn an dap p ro vedM r. Trap p ’ s as s ert i o n o f t he
s ect i on 6 6 6 3 ci v i l frau dp en al t y i n wri t i n g .- 2 4 -

[* 2 4 ] ULTIM ATE FINDINGS OF FACT Al th ou g h i t h as a t an g ledb ack g ro un d , th is i s a s i m p l e cas e. Pet i t i o n er was
an at t o rn ey

wh o s p eci al i zedi n t ax frau dd efen s e. Inth e cl erg y l aws ui tp et i t i o n er’ s cl i en ts ag reedt o p ay

p et i t i on er a 6 0% fee fo r h i s l eg al s erv i ces an dn ev er fi l eda fee d i sp u t e arb i t rat io n ab o u tp et i t i o ner’ s fee. Pet i ti o n er recei v edth e cl erg y l aws u i t
s et t l em en tfu n d s i n to th e UBS acco u nt --wh ich h e al on e co nt ro l l ed --i n Decem b er 2 0 0 7 . Ind oi ng s o , h e co m m i n g l edh i s fee an dh i s cl i en t s’ fu nd s i n thatacco u n t . Al s o in Decem

b er 2 0 0 7 p et i t i o n er ex erci s edd o m i n i o n an dco n t ro l o v er t h e fu n d s , rep eat ed l y

u s i n g th e fu n d s an di n t eres tearn edo n t h e fu n d s fo r h i s p ers o n al
en jo ym en t . Pet i t i on er fai l ed t o acco u n tfo r t hes e fu n d s i n h i s b us i n es s l ed g ers , h o wev er, an dch o s e n o t t o rep orth i s cl ai m ed 6 0 % fee as i n co m e fo r 2 0 0 7
. Pet i t io n er al s o rep eat ed l y cl ai m edi n s ev eral p ri o r p ro ceed i n g s th at h i s cl i en t s
n ev er d i s p u t ed h i s fee. Th o s e tri b u nal s d eal i n g wi t h th os e p ro ceed in gs accep t ed
an d fo un das a fact th atn o fee d i s p u t e ex i st ed . Pet i t i on er al so rep eat ed l y cl ai m ed th atUBS h adi n ves t edth e cl erg y l aws u i ts et t l em en tfu nd s i n au ct i o n rat e s ecu ri t i es wi th o u th i s au t h o ri zat io n. Th i s was u n t ru e wh en fi rs tas s ert edan drem ai ned
u n tru e wh en p et i ti o ner as s ert edi t ag ai n t hro u gh o u tth e ex am i n at io n o f h i s 2 0 0 7 i n co m e t ax retu rn .- 2 5 -

[* 2 5 ] In s h o rt , (1 ) p et i t i o ner h add o m i n i o n an dco n t ro l o v er al l o f h is cl ai m ed 6 0 % fee i n 2 0 0 7 ; (2 ) h e ex erci sedd o m i n i o n an d co n t ro l o v er t h e en t i re am o u n tfo r h i s p ers o n al u s e i n 2 0 0 7 ; (3 ) h e fai l edt o rep o rt h is as s ert ed 6 0 % fee as i n co m e fo r 2 0 0 7 ; (4 ) h e rep eat ed l y

cl ai m ed , s u cceed edi n co nv i n ci n g p ri or t ri b u n al s t o fi n das a fact , an dp ers o n al l y

b en efi t edfro m

p ri o r t ri b u n al s ’ fi n d i n g th at n o fee d i sp u t e
ex i s t edb et ween h i m an dh i s cl i en t s ; an d(5 ) h e as s ert ed u n t ru e t heo ri es reg ard i n g th e o wn ers h ip an di n ves tm en td eci s i o n s rel at i n g t o th e cl erg y l aws u i ts et t l em en t fu n d s i n v ari o u s p ro ceed i n gs --i n cl u d in g t h i s o n e. OPINION Pet i t i o ner b ears th e b u rd en o f p ro vi n g th at t he d efi ci en cy d et erm i n at i o n i n th e n o ti ce o f d efi ci en cy

i s i n co rrect . See Ru l e 1 42 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). Co nv ers el y , res p o n d en tb ears th e b u rd en o f p ro vi n g n ew
m at t ers as s ert edi n h i s an s wer an dn o td et erm i n edi n th e n o ti ce o f d efi ci en cy . See Ru l e 1 4 2 (a). Fi n al l y , res p o nd en tb ears t he b u rd en o f p ro v in g , b y cl ear an d
co n vi n ci n g ev id en ce, t h atp et i t i o n er i s l i ab l e fo r t h e s ect i o n 6 6 6 3 ci v i l frau d p en al ty . See Ru l e 1 42 (b ). If res p o n d en tm eet s th atb u rd en , we p res u m e t h atth e
en t i re u n d erp aym en ti s at t ri b u t ab l e t o frau d u n l es s p et i t i o n er can s h o w b y a p rep o n d eran ce o f t h e ev i den ce t h ats o m e p o rt io n i s n o tat tri b ut ab l e t o frau d . See
s ec. 6 6 63 (b ).- 2 6 -

[* 2 6 ] I. Un rep o rt edIn co m e In th e n ot ice o f d efi ci en cy res p o nd en t d et erm i n eda d efi ci en cy o f $ 2 ,5 8 3 ,3 7 4 s t emm i ng fro m p et i t i o n er’ s u n rep o rt ed l eg al fee i n co m e i n 2 0 0 7 . In
cas es ap p eal ab l e t o t h e U.S. Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i t , as th i s cas e i s , ab s en ta s t ip u l at i o n t o th e co nt rary , s ee s ec. 7 4 8 2 (b ), th e Co m m i s s i o n er’ s d et erm i n at i o n t h ata t ax p ay er u n d errep o rt edi n co m e i s p res u m edco rrect o n l y i f i t i s s up p o rt edb y

a m i n i m al fact ual fo u n d at i o n , s ee Pal m er v . Un i t ed St at es , 1 1 6 F.3 d1 3 0 9 , 1 3 1 2 (9 t h Ci r. 1 9 9 7 ). If t h e d et erm i n at i o n i s s o s up p o rt ed , th e b u rd en
o f p ro o f res t s wi t h th e t ax p ay er t o p ro v e t h atth e d et erm i n at i o n i s i nco rrect . 1 4 Th e
v ari o u s s t i p u l at i o n s an dex h i b i t s i n th e reco rd --i n cl u d i ng wi t h o u tl i m i t at i o n p et i t i o n er’ s UBS acco u n ts t at em en t s , h i s fee arran g em en t s wi t h h i s cl i en t s , an d t h e
v o l u m i no u s reco rd o f p ri o r p ro ceed i n g s --p ro vi d e t h i s fo u n d at i on . Pet i t i on er th erefo re b ears th e b u rd eno f p ro vi n g th atres p o n d en t ’ s d efi ci en cy d et erm i n at i o n i s i n co rrect . In h i s am en d edan s wer, res p o n d en t as s ert edan i n creas edd efi ci en cy o f $ 2 ,8 2 4 ,1 0 2 fo r t ax y ear 2 0 0 7 ; res p o n d en t b ears th e b urd en o f p ro o f as t o th e $ 2 4 0 ,7 2 8 i n creas e. See Ru le 1 4 2 (a).

1 4 Th e b urd en o f p ro o f as t o p ers u as i o n g en eral l y d o es n o ts h i ftu n l es s th e req u i rem en t s o f s ec. 7 4 9 1 (a) are m et . See Ru le 1 4 2 (a)(2 ).- 2 7 -

[* 2 7 ] Gen eral ly , g ro ss i n co m e m ean s al l i n co m e fro m wh at ev er s ou rce d eri v ed
. Sec. 6 1 (a). When a t ax p ay er rep o rt s h i s i n co m e u n d er t h e cas h b as i s m et h o do f
acco u n t in g , the t ax p ay er m us t rep o rti n co m e fo r t h e earl i es ty ear t h ath e act u al l y o r
co n st ru ct i v el y

recei v es th e i nco m e. Sec. 1 .4 5 1 -1 (a), In co m e Tax Reg s . If a t ax p ay er h as m o n ey

cred it edt o h i s acco u n t , h as m o n ey s etas i d e fo r h i m , o r
o th erwi s e h as m o n ey

m ad e av ai l ab l e s o th atth e t ax p ay er m ay draw up on i tatan y t i m e, t he t ax p ay er h as co n s t ru ct i v el y recei vedth e i n co m e i n th aty ear. Sec. 1 .4 5 1
- 2 (a), In co m e Tax Reg s . If co n t ro l o f t h e recei p to f t h i s m o ney i s s ub ject t o a
s ub s t an t i al l i m i t at io n o r res t ri ct i o n , h owev er, t h e t ax p ay er h as n o tco ns t ru ct i v el y recei v edth e i n co m e. Id
. Un d er th es e p ri n ci p l es , a t ax p ay er d o es n o treco gn i ze as i n co m e fu nd s th e t ax p ay er h o l d s i n t ru stfo r t he b en efi to f an o t her. Fo rdDeal ers Adv ert . Fu n d , In c.
v . Co m m i s s i o n er, 5 5 T.C. 7 6 1, 7 7 1 (1 9 7 1 ), aff’ d , 4 5 6 F.2 d2 5 5 (5 t h Ci r. 1 9 7 2 ). Acco rd in g ly , wh en a l awy er rep o rt i n g o n a cas h b as i s h o ld s fu n ds fo r t h e b en efi t
o f h i s cl ien t s i n a t ru stacco u ntan dco m p l i es wi t h t h e req u i rem en t s p l aced o n tru st
acco u n t s b y

th e rel ev an tru l es o f p ro fes s i o n al co n du ct , th e fu n d s are n o ti n co m e t o th e l awy er. See M i el e v . Co m m i ss i o n er, 7 2 T.C. 2 8 4 , 2 9 0 (1 9 7 9 ); s ee al s o Can at el l a v . Co m

m i s s i o n er, T.C. M em o . 2 0 1 7-1 2 4 , at* 1 4 -* 1 5 . On ce t h e l awy er h as p erfo rm edwo rkfo r t h e cl i en tan db i l l edfo r h i s s erv i ces ag ai n s tam o u n t s h el d- 2 8 -

[* 2 8 ] i n th e cl i en t tru s t acco u n t , h o wev er, t he l awy er h as earn edth atam o u n t wi th o u ts ub s t an t i al l i m i t at i o n o n h i s ri g h tt o the fu n d s . See M i el e v . Co m m i s s i o n er, 7 2 T.C. at 2 9 0
. Becau s e t h e l awy er h as co n s tru ct i vel y recei v edth e i n co m e, th atam o u n t rep res en t s i n co m e i n th e y ear earn ed . See i d
. ; s ee al s o Can at el l a v . Co m

m i s s i o n er, at* 1 4 -* 1 5
. A. Cal i fo rn i a Cl i en tTru stAcco u n t s Un d er Ru l e 4 -1 00 Ru l e 4 -1 0 0 (A), as i n effect i n 2 0 07 , p ro v i d edth at a l awy er m u s td ep o s i t cl i en t fu n d s i nt o o n e o r m o re i d en ti fi ab l e “ b an kacco u n t s ”. Fo r n o n -IOLTA cl ien t tru s tacco u n t s , 1 5 Cal i fo rn i a l aw i n 2 0 0 7 p erm i t t eda l awy er t o h ol d cl i en t tru s t fu n d s i n “ o n e o r m ore i n t eres tb eari ng b an kacco u n ts o r o t h er tru s ti n v es t m en t s as
m ay b e p erm i t t edb y

th e Sup rem e Co u rt , wi t h the i n t eres to r d i v i d en d s earn edo n th e acco u n t s p ay ab l e t o cl i en t s”. Cal . Bu s . & Pro f. Co d e s ec. 6 2 1 1 (b ) (W es t 2 0 0 7 ). Th e Cal i fo rn i a Suprem e Co u rt , h o wev er, h ad n o tan dt o d at e h as n ev er p erm i t t edat t o rn ey s t o u s e i n v es t m en tacco un t s o r an yt h i n g o th er t h an a d ep o s i t o ry b an k acco u n tas a p erm i ss i b l e n o n -IOLTA cl i en ttru s tfu n d . See Cal . Prac. Gu id e Pro f. Res p . ch
. 9 -B, s ec. 9 : 7 2.2 (2 0 1 9 ).

1 5 Pet i t i o ner co n ced es th atth e UBS acco un twas n otan IOLTA cl i en ttru s t acco u n t . Th erefo re, we d i s cu s s o n l y th e req ui rem en t s o f n o n-IOLTA cl i en ttru s t acco u n t s u n der Cal ifo rn i a l aw.- 2 9 -

[* 2 9 ] Reg ard l es s o f t h e t y p e o f cl i en ttru s t acco u n t , wi t h v ery l i m i tedex cep t i o n s , a l awy er m

u s tn o td ep o s i tfu n ds b el o n g i n g t o th e l awy er i n th e cl i en ttru stacco u n t
o r o th erwi s e co m

m i n g le fu n d s i n th e acco u n t . Ru l e 4 -1 00 (A). Th e l awy er m u st
rem o v e h i s p o rt i o n o f fees earn edas s o o n as p o s s i b l e. Ru l e 4 -1 0 0 (A)(2 ). If t h ere i s a d i s p u t e as t o the l awy er’ s fee, h o wev er, “ t h e d is p u tedp o rt i o n s h al l n o tb e wi th drawn u n t i l th e d i s p u t e i s fi n al l y res o l v ed .” Id . Inm an ag i n g cl ien ttru s t
acco u n t s, a l awy er m

u s tm ai nt ai n ad equ at e reco rd s “ o f al l fu n d s, s ecu ri ti es , an d
o th er p ro p ert i es o f a cl i en t * * * an dren d er ap p ro pri at e acco un t s t o th e cl i en t reg ard i n g th em ”. Ru l e 4 -1 0 0 (B)(3 ). B. Th e Part i es ’ Arg u m en t s Reg ard i n g Ru l e 4 -1 0 0 Pet i t i o ner co n ten d s th ath i s fee wi t h res p ectt o th e cl erg y l aws u i t s et t l em en t (t he fu n d s o f wh i ch were d ep o s i t edi n th e UBS acco u n t i n Decem b er 2 00 7 ) s h o u ld
n o tb e i n cl u d edi n h i s i n co m e fo r t ax y ear 2 0 07 b ecau s e t h e Bro t h ers al l eg ed l y d i s p u t edh i s fee. Becau se t h e Bro t h ers al leg ed l y d i s p u t edh i s fee, p et i t i o n er arg u es , p u rs u an tt o ru l e 4 -1 00 (A)(2 ) h e co u l dn o tet h ical l y d i s b u rs e h i s fee fro m th e acco u n t . In s t eado f b ei n g p ro p erl y i n cl u d ab l e i n i n co m e fo r 2 0 0 7 , p et i t i o n er
co n ten d s h i s fee was p ro p erl y i n cl u d ab le fo r t ax y ear 2 0 09 --t h e y ear i n wh i ch th e fee d i sp u t e was al l eg ed l y res o l v ed . Pet i ti o n er al s o arg u es th at t h e s ect io n 6 5 0 1- 3 0 -

[* 3 0 ] s t atu t e o f l i m it at i o n s o n as s es s m en tb ars as s es s m en tan dco l l ect i o n o f an y i n co m e t ax l i ab i l i t y

fo r 2 0 0 9
. In s up p o rt , p et it i o n er rel i es o n v ari o us Cal i fo rn i a at t o rn ey d is ci p l i n e cas es
as wel l as o u r p ri or d eci s i o n i n M i el e v . Co m m i s s i o n er, 7 2 T.C. 2 8 4
. 1 6 Onth e b as i s o f t h e Cal i fo rn ia cas es , p et i t i o ner arg u es th atth e al l eg ed fee d i s p u t e p rev en tedh i m

fro m wi t h drawi n g h i s fee an d s o h i s i nt eres t was n o tfi x ed . Rel y in g
o n M iel e, p et i t i o n er al s o arg u es th atwe h av e reco g n i zedth ata St at e’ s ru l es o f p ro fes s i on al p ract ice can i m p o s e a b arri er t o th e wi t h drawal o f fu n d s fro m a cl i en t tru s tacco u n tu n t i l “ earn ed ”. Becau s e p et i ti o n er co u ldn o t wi t h draw t h e fu n d s o n
acco u n t of an al l eg edfee d i s p u t e u n d er Cal i fo rn i a l aw, h e h as n ot “ earn ed ” t h e fu n d s wi th i n th e m ean in g o f M i el e an ds o th e fu n d s were n o ti n co m e fo r 2 0 0 7
. Res p o n d en tco u n ters wi t h s ev eral arg u m en t s fo r wh y ru l e 4 -1 0 0 can n o t
s h i el d p et i t i o n er fro m

reco g n i zi n g i n co m e fo r 2 0 07 fro m th e cl erg y l aws u i t
s et t l em en t . Fi rs t , res p o n d en t co n ten d s th atb ecau s e t h e UBS acco u n twas n o ta cl i en t tru s tacco u n twi th i n th e m ean i n g o f Cal i fo rn ia l aw, ru l e 4 -1 0 0 (A) co u l dn o t

1 6 E.g ., Si l v er v . St at e Bar, 5 2 8 P.2 d 1 1 5 7 , 1 1 6 2 (Cal . 1 9 7 4 ); Fracas s e v . Bren t , 4 9 4 P.2 d 9 , 1 3 (Cal . 1 9 7 2 ); Fai r v . Bakh t i ari , 1 2 5 Cal . Rp t r. 3 d7 6 5 , 7 7 6 (Ct . Ap p . 2 0 1 1 ); Kal l en v . Del ug , 2 0 3 Cal . Rp t r. 8 7 9 , 8 8 5 (Ct . Ap p . 1 9 84 ); In re Fo n t e, 2 Cal
. St at e Bar Ct
. Rp t r. 7 52 , 7 5 8 (Rev i ew Dep t . 1 9 94 ).- 3 1 -

[* 3 1 ] i m p o s e an y l i m i t at i o n s o n fu n d s h el dwi th i n th e UBS acco u n t. Res po n d en t
n o t es th atal t h o u g h Cal i fo rn i a l aw al l o wedfo r th e p os s ib i li t y o f i n v es t m en t
acco u n t s b ei n g u s edt o h o l dcl i en ttru s t fu n d s , i tex p res sl y co n d i ti o n edth at p o s s i b i l i ty

o n th e Cal i fo rn i a Sup rem e Co u rt ’ s ap p ro vi n g s u ch acco un t s fo r cl i en t tru s tfu n d s . Cal
. Bu s . & Pro f. Co d e s ec. 6 2 1 1(b ). Becau se t he Cal i fo rn i a Sup rem e Co u rth as n ev er ap pro v eds u ch acco u n t s , res po n d en t co n t en d s th atth e o n l y p erm i s s i b l e n o n -IOLTA cl i en t t ru s tacco u n t ty p e i s a b an k acco u n t . In
res p o n d en t’ s v i ew t h e UBS acco u n twas n o ta b an kacco u n t ; i twas an i n v es t m en t b ro k erag e acco u n t th atcan n o t qu al i fy as a n o n-IOLTA cl i en ttru s tacco u n tan di s
n o ts ub jectt o th e l i m i t at i o n s ru l e 4 -1 0 0 i m p o s es o n tho s e acco u n t s . Th erefo re,
res p o n d en t arg u es thatru l e 4 -1 0 0 p o s edn o l im i t at i o n o n p et i t i on er’ s acces s t o the fu n d s o n ce d ep o s i t ed
. Seco n d , res p o nd en targ u es th atev en i f t he UBS acco u n twas a n o n -IOLTA cl i en t tru s tacco u n t , p et i t i o n er’ s o n g o i n g v i ol at io n s o f t h e co n d i ti o n s o f ru l e 4 -1 0 0
s h o w th atth e p et i ti o n er d idn o tab i d e b y th e ru l e. Res p o n d en tco n t en ds th at p et i t i o n er co m

m i n g l ed h i s fu n d s wi t h h i s cl i en t s ’ fu nd s , ap pro p ri at edi n t eres t
earn edo n t h e s et t lem en tfu nd s b el o ng i n g t o h i s cl i en t s , fai ledt o p ro m p t l y res o l v e
an y al l eg edd i s p u t es as t o h i s fee t h ro u g h ap p ro p ri at e ch an n el s , an dfai l edt o k eep
an d p ro v i d e t o h i s cl i en t s an ap p ro p ri at e acco u n t i ng o f t h e s et t l em en t fu n d s .- 3 2 -

[* 3 2 ] Becau se o f t h es e v i ol at i o n s o f ru l e 4 -1 0 0 , res po n d en t u rg es th atru l e 4 -1 0 0 d i dn o t l i m i tp et i t i o n er’ s acces s t o th e fu n ds h el di n t h e UBS acco u n ti n 2 0 0 7
. Fi n al l y , ev en i f ru le 4 -1 0 0 s ub s tan t i al l y l i m i t ed p et i t io n er’ s ri gh tt o s o m e p o rt i on o f t h e fu n d s i n t h e UBS acco u n t , res p o n d en tco n t en d s th atp et i t i o n er s t i l l
s h o u ldh av e i n cl u d edth e u n d i s p u t edp o rt i o n o f h i s fees i n i n co m e an dth atp o rt i o n
o f t h e d i s p u t edfu n d s t o wh i ch p et i t io n er h ada cl ai m o f ri gh t --ev en i f h e m i g h t l at er h av e h ad t o rep ay

s o m e p o rt i o n t o h i s cl i en t s . Ins up po rt , res p o n den tal s o rel i es o n o ur p ri o r Op i ni o n i n M i el e as wel l as th e cl ai m -o f-ri gh t d oct ri n e ap p li cab l e t o cas h b as i s t ax p ay ers . Res p o n d en tco n t en d s t hatM iel e req u i res th at
an at t o rn ey

wh o h as an es tab l i s h edfee arran g em en t , p erfo rm s wo rkrel at edt o th at
arran g em en t , an dh ol d s cl i en ttru s tfu n d s i n a cl i en ttru s tacco u ntt o i n cl u d e h i s
u n d i s p u t edfee am o u nt s as i n co m e ev en i f t he am o u nt s are h el di n a t ru s tacco u n t
an d are n o ttran sferred t o th e t ax p ay er’ s o p erat i n g o r p ers o n al acco u n t . M o reo v er,
res p o n d en t co nt en d s thatp et it i o n er al s o s h o ul dh av e i ncl u d edas i n co m e t h o s e
am ou n t s d i s p u t ed b y h i s cl ien t s b ecau s e h e h ada cl ai m o f ri g h t o v er t h e fu n d s
ev en if h e al leg ed l y

l at er h adt o rep ay t he am o u n t s t o h i s cl i en ts aft er an y fee d i s p u t e was res o l v ed . Becau s e p et i t i on er h ada cl ai m o f ri g h t(ev en i f t here was a p en di n g d i s p u t e) o ver h i s t o tal as s ert edfee am o un t s , res p o n d en tco n ten d s th at p et i t i o n er s h o u l dh av e i ncl u d edth es e am o u nt s as i nco m e fo r 2 0 07
.- 3 3 -

[* 3 3 ] C. An al y s i s As n o tedab o v e, p et i t i on er’ s p ri m ary arg u m en tfo r o m i t t i ng h i s fee fro m i n co m e fo r 2 0 07 i s th atru l e 4 -1 0 0 l im i t ed h is ri g htt o rem o v e t h e fee fro m th e UBS acco u n tb ecau s e th ere was a fee d is pu t e. Onth e reco rdb efo re u s , we
co n cl u d e th atth e d o ct ri n e o f ju d i ci al es t o p p el b ars p et i t i o ner fro m as s ert i n g th i s p o s i t i on . M o reo v er, ev en i f a fee d i s p u t e ex i s t ed , we co n cl u d e t h at ru l e 4 -1 0 0
-- as s u m in g i tap pl i es t o p et i t i o ner’ s UBS acco u n t 1 7 --d i dn o ti m p os e a s ub s tan t i al l i m i tat i on o n p et i t i o n er’ s acces s t o the fu n d s . On t h e co n t rary , p et i t i o n er’ s
co n du ct i n es t ab li s hi ng , d i rect i n g th e i n v es t m en tact i vi t i es o f, an d fai l i n g t o p ro p erl y acco u n tfo r t h e UBS acco u n t --al l o f wh i ch v i ol at e t h e t erm s o f ru l e 4
- 1 0 0 --p ro v es th atat n o p o i n td i dru l e 4 -1 0 0 actu al l y l i m i t p et i t io n er’ s acces s t o th e fu n d s h el dth erei n . Pet i t i o n er refu s edt o co nfo rm h i s b eh av i o r t o th e l i m i t s o f ru l e 4 -1 0 0 wh i l e i n p ract i ce; h e can n o tn o w wi el di tas a s h i el dt o rep o rt i n g i n co m e h e i n fact earn edi n t ax y ear 2 0 0 7
.

1 7 Pet i t i o ner’ s arg u m en tas s u m es t h atth e UBS acco u n twas a v al i d cl i en t tru s tacco u n twi th i n th e m ean i n g o f Cal i fo rn ia l aw. Res p o n d en t , i n h i s an s weri n g b ri ef, ch al l en g es th i s thres h o ldas s um p t i on . W e n eedn o t res o lv e th i s qu es t i o n o f Cal i fo rn i a l aw b ecau se we co n cl u d e th at , i n an y ev en t , p et i ti o n er d i dn o tco n fo rm h i s co n du ctt o th e ru l e ev en as s u m in g i tap p l i edt o th e UBS acco u n t.- 3 4 -

[* 3 4 ] 1
. J u d i ci al Es t o p p el Bars Pet i t i o ner Fro m As sert i n g Th ata Fee Di s p u t e Ex i s t ed
. Pet i t i o ner arg u es th ath e co ul dn o treco g n i ze i n co m e fro m th e cl erg y

l aws u i t
s et t l em en tb ecau s e cl i en t s d i s p u t edh i s fees an d , u n d er ru l e 4 -1 0 0, h e was b arred fro m d i s b u rs i n g h i s fee u n t i l t h atfee d i s pu t e was res o l v ed . Inp ri o r p ro ceed i n g s , h o wev er, p et i t i o n er t oo kp reci s el y the o p p o s i t e t ack ; h e rep eat ed l y rep res en t ed , an d earl i er t ri b u nal s accep t edas tru e, t h at n o fee d i s p u t e ex i s t edb et w een h i m an d h i s cl i en t s . J u d i ci al es t o p p el i s an equ i t ab l e d o ct ri ne we m ay i n v o k e i n o u r d i s cret i o n

“ t o p ro t ectth e i n t eg ri t y

o f t h e ju d i ci al p ro ces s” an d “ t o p rev en t[t he] ‘ i m pro p er u s e
o f ju d i ci al m ach i n ery ’ ”. New Ham p s h ire v . M ai n e, 5 3 2 U.S. 7 4 2 , 7 49 -7 5 0 (2 0 0 1 ) (fi rs t qu o t i n g Edward s v . Aetn a Li fe In s . Co ., 6 9 0 F.2 d5 9 5 , 5 9 8 (6 t h Ci r. 1 9 8 2 );
an d th enquo ti n g Ko ns t an t i n i d i s v . Ch en , 6 2 6 F.2 d9 33 , 9 38 (D.C. Ci r. 1 98 0 )). Un d er t h e d o ct ri n e, wh ere a p art y h as “ as su m [ed ] a cert ai n p os i t i o n i n a l eg al p ro ceed in g , an d s ucceed [ed ] i n m ai n t ai n i n g th atp o s i t i o n , h e m ay n o tthereaft er,
s i m p l y b ecau s e h i s i n t eres t s h av e ch an g ed , as s um e a co n t raryp o s i t i o n ”. Id . at7 4 9 (qu o ti n g Dav i s v . W ak el ee, 1 5 6 U.S. 6 8 0 , 6 8 9 (1 8 9 5 )). Th e U.S. Co u rto f Ap p eal s fo r t h e Ni n t h Ci rcu i t , t o wh i ch an ap p eal o f th is cas e wo u l dl i e ab s en t a s t ip u l at i o n t o the co n t rary , ex am i nes t h ree fact o rs i n as s es s i n g wh et h er t o ap p l y ju d i ci al- 3 5 -

[* 3 5 ] es t o p p el : (1 ) wh et h er t h e p art y ’ s l at er p o s i t i on i s “ cl earl y i nco n s i s t en t ” wi t h i t s earl i er p o s i t i o n ; (2 ) wh et h er t h e p arty s u cceed edi n p ers u ad in g th e p ri o r tri b u nal t o accep tth e earl i er p os i t i o n ; an d(3 ) wh et h er th e p art y s eek i n g t o as s ert th e i n co n s i s t en tp o si t i o n wo u l d“ d eri v e an u n fai r ad v an tag e”. M i l t o n H. Green e Arch i v es , In c. v . M ari l yn M o n ro e LLC, 6 9 2 F.3 d9 8 3 , 9 9 4 (9 t h Ci r. 2 0 1 2 ) (qu o ti n g New Ham

ps h i re, 5 3 2 U.S. at7 5 0 -7 5 1); s ee al s o Fazi v . Co m m i s s i o n er, 1 0 5 T.C. 4 3 6 , 4 4 4 -4 45 (1 9 9 5); Hu dd l es to n v . Co m m i s s i o n er, 1 0 0 T.C. 1 7, 2 6 (1 9 9 3). In ap p l y i ng th es e fact o rs , o u r p aram o un tco n cern i s t o p ro t ect“ t h e d i g n i t y
o f ju d i ci al p ro ceed i n g s” fro m a p art y “p l ay i n g fas tan d l o o s e wi th t he co u rt s .” M i l to n H. Green e Arch i ves , In c., 6 9 2 F.3 dat9 9 3 (quo t i ng Ham i l t o n v . St at e Farm Fi re & Cas . Co ., 2 7 0 F.3 d7 7 8 , 7 8 2 (9 t h Ci r. 2 0 0 1 )). W e d o n o ti n v o ke ju d i ci al es t o p p el l i g h t l y . Rat her, we are carefu l t o
co n si d er h o w i tcan “ i m

p in g[e] o n t h e t ru t h -s eek i n g fu nct i o n o f t he co u rtb ecau s e th e d o ctri n e p recl u des a co n t rad i ct o ry p os i t i o n wi th o u tex am in i n g t h e t ru t h o f ei th er s t at em en t . ” Fazi v . Co m m i s s i o n er, 1 0 5 T.C. at4 4 5 (qu o t i n g Tel ed yn e In du s., In c. v . NLRB, 9 11 F.2 d 1 2 1 4, 1 21 8 (6 t h Ci r. 1 9 9 0 )). In ap p ro p ri at e ci rcu m s t an ces , h o w ev er, we ap p l y th e d o ct ri n e b ecau s e t o fai l t o d o s o wo ul d reward a l i t i g an t ’ s “ cyn i cal g am es m an s h i p ”. Hu d d l es t o n v . Co m m is si o n er, 1 0 0- 3 6 -

[* 3 6 ] T.C. at2 6 (qu o t i n g Tel ed yn e In du s ., In c., 9 1 1 F.2 d at1 21 8 ); s ee al s o Bau gh m an v . W al tDi s n ey W o rl d Co ., 6 85 F.3 d 1 13 1 , 1 1 3 3-1 1 34 (9 t h Ci r. 2 0 1 2 ). Pet i t i o ner’ s cu rren tp o si t i o n d i rect l y co n t rad i ct s h i s p o s i t i on i n th e Lo s An g el es Co u n ty

Sup eri o r Co u rti n t erp l ead er p ro ceed i n g s . Befo re t h attri b u n al , p et i t i o n er b el i ev edi twas i n h i s i n t eres tt o s ay th ath i s cl i en t s were s at i s fi edwi t h h i s s erv i ces , s o h e cl ai m ed , an dp ro du cedd ecl arat i o n s i n s up po rto f t h atcl ai m , th atn o fee d is p u t e ex i st ed . Onth e b as i s o f t h i s rep res en t at i o n an dth e ev i d en ce p et i t i o n er s ub m it t ed , th e co u rt -o rd eredarb i trat i o n accep tedan dfo u n d as a fact th at
n o d i s p u t e ex i s t ed
. 1 8 Th e Lo s An g el es Co u n t y Sup eri o r Co u rti n tu rn o rd eredth at th e i n t erp l ead edfu nd s b e d i s tri b u t edt o p et i t i o n er, i n rel i an ce o n th e arb i trat o r’ s fi nd i ng th atth ere was n o fee d i s p u t e. No w th ati t i s i n p et i t i o n er’ s i n t eres tt o s ay t h ath i s cl i en t s were n o ts at i s fi ed wi th h is s erv ices an d t h at a fee d i s p u t e ex is tedi n 2 0 07 , h is s t o ry h as ch an g ed . In
s wo rnt es t i m o n y , p et i t i o n er rep eat ed l y s t at edth atth e Bro th ers al way s d i s p u t edh i s fee. In s o t es t i fy i n g , p et i t io n er i g n o redan dd i dn o tev en m en t i o n th e Lo s An g el es

1 8 As n o t edab o ve, t h e arb i t rat o r’ s s i x t h d et erm i n at i o n read s : “No n e o f Res po n d en tIs aacs o n ’ s cl i en ts ev er ch al len g ed o r ev en qu es ti o n edan y ri g hto r am ou n to f at t o rn ey ’ s fees ch arg edb y o r p ai dt o th e Res p o n d en tIs aacs o n i n co n nect io n wi t h th e s ex ual ab u s e l i t i g at i o n.”- 3 7 -

[* 3 7 ] Co u n t y

Sup eri o r Co u rt ’ s rel i an ce o n h i s earl ier rep res en t at i o n s t hatn o fee d i s p u t e ex i s t ed
. Pl ai n l y , th es e p o s i t i o ns can no tb o t h b e t ru e--a fee d i s pu t e i s n o Sch rö d i ng er’ s cat . As a t ri al co u rt , we o rd in ari l y d o n o t s h i rkfro m

o u r du ty t o d et erm i n e wh atfact s are p ro ven b y th e reco rdb efo re u s . Pet i t io n er as k s u s t o d o
s o m et h in g fu n d am en t al l y i m p ro p er, t h ou g h; h e wo u l dh av e t h i s Co u rtqu es t i o n , an d p erh ap s co n t rad i ct , a s i st er t ri b u n al ’ s n earl y d ecad e-o l dfi n d i n g , m ad e i n rel i an ce o n h i s rep res en t at i on s b efo re t h attri b u n al . W ors e s t i l l , th e p ri o r fi n d i n g th atp et i t i o n er wo u ldh av e u s qu es t i o n res u l t edi n a s ub s t an t i al d i s t ri b ut i o n o f fu n d s t o h i m . Wh atp et i t i o ner as k s u s t o d o, i n s h o rt , i s reward h i s “ cyn i cal g am es m an s h ip ”. See Hu d d l es t o n v . Co m m i s s i o n er, 1 0 0 T.C. at 2 6 (qu o ti n g Tel ed yn e In du s ., In c., 9 11 F.2 d at1 2 1 8 ). W e d ecl i n e t h e i nv i t at io n. In th es e l i m i t edci rcu m s t an ces , we h o ldp et i t i o n er t o h i s p ri o r rep res en t at i o ns th atwere accep t edas t ru e an d rel i edupo n b y a p ri o r t ri b u n al . To
n o td o s o wo u l dwro n g l y en co u rag e “ t h e p ercep t i on th at ei t h er t h e fi rs t o r th e
s eco n dco u rtwas m i s l ed ,” New Ham p sh i re, 5 32 U.S. at7 5 0 (qu o t in g Edward s , 6 9 0 F.2 dat5 9 9 ), an drewardfu rt h er “ m an i p u l at io n o f t h e ju d i ci al p ro ces s ”, Hu d d l es t o n v . Co m

m i s s i o n er, 1 0 0 T.C. at 2 6 . Becau s e we es t o p p et i ti o n er’ s- 3 8 -

[* 3 8 ] arg u m en treg ard i n g th e ex i s t en ce o f a fee d i s p u t e, we fi n dth atp et i t i o n er h as fai l edt o carry h i s b u rd en t o d i s p ro v e t h e d efi ci en cy d et erm i n edi n th e n o t ice o f d efi ci en cy . W e fu rt h er co n cl u de t h at , as t o th e n ew m at t ers as s ert edi n h i s an s wer,
res p o n d en t h as carri ed h i s b u rd en o f p ro o f. Th e s t i pu l at i o ns an dev i d en ce i n th e
reco rdcl earl y

es t ab l i s h th e fo l l o wi n g fact s . Pet i t io n er’ s cl ien t s ret ai n edh i m fo r l eg al s erv i ces . Pet i t io ner cl ai m eden t it l em en t t o a 6 0 % co n t i n g en cy fee th ro u g h ou tth e rep res en t at i on , b efo re each p ri o r t ri b u n al , an dth ro u g h o u t t hi s cas e. In Decem b er 2 0 07 th e cl erg y l aws u i ts et t l em en tfu n d s were wi redi n t o p et i t i o n er’ s UBS acco u n t . Fro m

th atm o m en tp et i t io n er h adn o s ubs t an t i al l i m i tat i on o n h i s ri gh t t o h i s as s ert edfee, s o h i s t o t al fee was rep o rt ab l e as i n co m e t o h i m fo r 2 0 0 7
. See M i el e v . Co m

m i s s io n er, 7 2 T.C. at2 90
. 2
. Ev en If Th ere W as a Fee Di s p u t e W i th Hi s Oth er Cl i en t s , Pet i t i o ner Un d i s p u t ed l y

Earn edHi s Fees Rel at edt o Cl ien t s 1 an d2 i n 2 0 0 7
. Ev en i f a fee d is p ut e ex i s t edb et ween p et i t i o n er an dth e Bro t h ers , p et i t i o n er
s t il l wo u l dh av e h adt o rep o rth i s fees fro m Cl i en t s 1 an d 2 fo r 2 0 0 7 . Pet it i o n er d o es no td is p u t e t hath e recei v edth e cl erg y l aws u i t s et t l em en t p aym en t i n 2 0 0 7
. Pet i t io n er al s o d oes n o t d i s pu t e t h atth es e t wo o f h i s cl i en ts u n d ers to o dan dd i dn o t d i s p u t e h i s 6 0 % fee. Ab s en t a d i s pu t e as t o the fee am o un t , al l the ev en t s wh i ch fi xedp et i t i o n er’ s ri gh tt o h i s 6 0 % fee fro m each o f t h es e cl i en t s h adtran s p i redb y- 3 9 -

[* 3 9 ] th e en do f t ax y ear 2 0 0 7
. Co n s equ en tl y , p et i t i o ner s ho u l dh av e reco g n i zed i n co m e fo r 2 0 07 as t o h i s 6 0% fee rel at i ng t o t h es e t wo cl ien t s , ev en i f t h ere was a d i s p u t e b et ween p et i t i o n er an do t h er cl i en t s.

3
. Ev en If Th ere W as a Fee Di s p u t e Bet ween Th em , Pet i t i o n er Di dNo tAb i d e b y Ru l e 4 -1 0 0 W i t h Reg ardt o th e Bro t h ers ’ Set t l em en tan dFees . He Ex erci sedDo m i n i o n an d Co nt ro l Ov er t he En t i re Cl erg y

Laws ui tSet tl em en t , an dTh erefo re Ru l e 4 -1 0 0 Im po s edNo Sub s t an ti al Li m i t at io n o n Pet i t i o n er’ s Acces s t o Hi s Fees Rel at ed t o th e Bro t h ers Hel di n th e UBS Acco u n t . Ev en i f th ere was a fee d i s p u te wi t h th e Bro t h ers , m o reo ver, p et i t i o n er can fi ndn o s h el t er wi th i n ru l e 4 -1 0 0 n o w b ecau s e h e d i dn otab i d e b y i twh i l e i n p ract i ce. Pet i t i o n er rel i es p ri m ari l y o n o u r p ri o r Op i n i on i n M i el e v . Co m m i s s i o n er, 7 2 T.C. 2 84 , t o s up po rth i s arg u m en tth ata fee d i s p ut e p l aces the fu n d s b ey o n d reco g n i t io n b ecau s e t h e ru l es o f p ro fes s i o n al co n du ctl im i t edh i s ri gh t s t o th e fu nd s . In teres t i ng l y , res po n d en tal s o rel i es o n M iel e fo r t h e o p p o s i t e
co n cl u s i o n --t h atp et i t i o n er s h o ul dh av e reco g n izedh i s fu l l as s ert ed fee am o u n tfo r t ax y ear 2 0 0 7
. Pet i t i o ner m i s read s M i el e. 1 9 Inth atcas e, we co n s i d ered t h e i m pact o f t h e Pen ns y lv an i a Co d e o f Pro fes s i o n al Co n du cto n wh ena t ax pay er-at t o rn ey m u s t

1 9 Pet i t i o ner al s o ci t es a n u m b er o f Cal ifo rn i a cas es , s ee s up ra n o t e 1 6 , th at are i n ap p l i cab l e b ecau se t h i s cas e d o es n o ttu rn o n Cal i fo rn i a l aw.- 4 0 -

[* 4 0 ] reco g n i ze i n co m e fro m fu n d s h el di n a cl i en ttru s tacco u nt . Th e t ax p ay ers th ere p ract i cedl aw an drep ort edth ei r i n co m e o n a cas h b as i s . M iel e v . Co m m i s s i o n er, 7 2 T.C. at 2 8 5
. Th ey m ai n t ai n eda cl i en ttru s tacco u n t“ [i ] n
co m p l ian ce wi t h Pen ns y l v an i a’ s Co d e o f Pro fes s i o nal Res p o ns i b i l it y ” an dp l aced al l cl i en tad v an ces , i n cl u d i n g ad v an ces fo r b o t h fu tu re cl i en tco s t s an dfu tu re l eg al
s erv i ces , i n t o thei r cl i en ttru s tacco u n t . Id . Th e t ax p ay ers co m p l i edwi t h al l

“ s eg reg at i o n an dacco u n t i n g m eas ures ” requ iredfo r s u ch acco un t s an dm ai n t ai n ed

“ a l ed g er card refl ect i n g al l cl i en ttran s act i o n s .” Id . Wh en a cl ien t ’ s cas e cl o s ed , th e fi rm wo u l dtran sfer al l earn edfees fro m th e cl i en t tru s t acco u n ti n t o th e fi rm ’ s
o p erat i n g acco u n t (an drefu n d edan y rem ai n d er t o th e cl i en t). In th ei r b oo k s o f
acco u n t , th e t ax p ay ers reco g n i zedi n co m e o n l y wh en fu n d s were act u al l y tran s ferred fro m

the cl ien ttru s tacco u n t i n t o th e fi rm ’ s o p erat i ng acco u n t . Fo r ad m i n is trat i v e p u rp o ses , th e fi rm ch o s e t o m ak e t h es e t ran s fers o nl y qu art erl y , av o id i n g t ran s ferri n g fu n ds i n No v em b er an dDecem

b er i f p o ss i bl e. Id . at2 8 6
. Th erefo re, wh en th e t ax p ay ers p rep aredth ei r Fed eral i n co m e t ax retu rn s , th ey rep o rt edo n l y

th ei r s h are o f i n co m e act u al l y tran s ferred t o th e fi rm ’ s o p erat i n g
acco u n t bu td i dn otrep o rtfees th ath ad b een earn edb u t n o tactu al l y tran sferred
o u to f t h e cl ien ttru s tacco u n t .- 4 1 -

[* 4 1 ] W e d et erm in edth atth e t ax p ay ers h adt o reco g n i ze i n co m e o n ce t h ei r fees h ad b een b il l edan dco ul dh av e b een rem o vedfro m th e cl i en ttru s tacco u n tev en i f th e fu n d s h adn o t , i n fact , b een rem o v ed . Id . at2 91 . Ind o in g s o , we reco g n i zed th atth e Pen n s y l v an i a Co d e o f Pro fes s i o n al Co n du cti m p o s eda s ub s t an t i al l i m i tat i on o n fu n ds h el db y the t ax pay er-at t o rn ey s fo r t h ei r cl i en t s . Th atl i m i t at i o n g av e way o n ce t h e at t orn ey s b i l l edth ei r fees an d h adan u n res t ri ct edri g h tt o
acces s th em . Id . at2 90
. Cri t i cal t o o u r d eci s i on i n M i el e was t h e fact th atth e at t o rn ey s co n s i s t en t l y
co m p l iedwi t h t h e res t ri ct io n s o n co m m i n g l i n g fu nd s , acco u n t i n g , an dacco u n t
m ai n t en an ce i m

p os edb y th e ru l es o f p ro fes s i o n al co n du ct . Id
. at2 8 5, 2 8 9-2 9 1
. Co n trary t o p et i t i on er’ s read i n g , M i el e s tan d s fo r t he u n rem ark ab le p ro p o si t i o n th atwh ere a t ax pay er-at t o rn ey ab id es b y th e ru l es g o vern i n g cl ien ttru stacco u n ts , an d th os e ru l es req u i re t h atfu n d s b e s eg reg at edan dacco u nt edfo r s ep arat el y fro m th e t ax p ay er-at t o rn ey ’ s o wnfu n d s , th en fu nd s h el d i n a cl ien ttru s tacco u n tare i n cl u d edi n i n co m e o n l y

o n ce a fee i s earn edag ai n s tth o s e fu n d s . Ou r recen t o p i ni o n i n Can at el l a v . Co m m i s s io n er, T.C. M em o . 2 0 1 7 -1 2 4 , co n fi rm s th i s read i n g o f M i el e v . Co m m i s s i o ner, 7 2 T.C. 2 8 4 . Th ere we
co n si d eredh o wru l e 4 -1 0 0 --th e s am e ru l e u n der wh i ch p et i t i o ner n o w s eek s refu ge--affect s a Cal ifo rn i a at t o rn ey ’ s reco g n i t i o n o f i n co m e. Th e t ax p ay er-- 4 2 -

[* 4 2 ] at t o rn ey

th ere m ai n tai n eds ev eral b an k acco u nt s wh i ch h e arg u edwere ei th er IOLTA o r n o n -IOLTA cl i en ttru s tacco u n t s wi t h i n t he m ean i ng o f Cal i fo rn i a l aw. Rel y i ng o n M i el e, we reco g n i zedth at ru le 4 -1 0 0 co u l di m p o s e a
s ub s t an t i al l i m i t at io n o n th e t ax p ay er-at to rn ey ’ s ri g h tt o fu n d s h el di n thes e
acco u n t s. Can at el l a v . Co m m i s s i o n er, at * 1 4 -* 15 . Th e t ax p ay er-at t o rn ey i n Can at el l a, h o wev er, fai l edt o co m p l y wi th ru l e 4 -1 0 0 . Th e p urp o rt ed cl i en ttru s t
acco u n t s were “ n o t l ab el ed* * * cl i en ttru s tacco u nt [s ] ” an dth e t ax p ay er-at t o rn ey reg u l arl y co m m i n gl edfu n d s . Id . at * 1 5. Becau s e t h e t ax p ay er-at t o rn ey d idn o t

“ fo ll o w th e l ab el i ng , an t i co m m i n g l i n g , an dreco rd -k eep i n g req u irem en ts ” o f ru l e 4 -1 0 0, we h el dth atal l fu n ds i n t h e acco u nt s were rep o rt ab l e as i n co m e (ex cep tfo r
am ou n t s actu al l y

p ai do u tt o h i s cl i en t s ) b ecau s e t h e t ax p ay er-at t o rn ey t reat ed th o s e fu n d s “ as ‘ b el o n gi n g t o h i m .’ ” Id . (ci t i n g Heal y v . Co m m i ss i o ner, 3 45 U.S. 2 7 8 , 2 8 2 (1 9 5 3)). Pet i t i o ner’ s arg u m en ti s es s en t i al l y i d en t i cal t o t h ato f t h e t ax p ay er-at t o rn ey i n Can at el l a an d , l i k e t h e t ax p ay er-at t o rn ey t h ere, p et i t i o n er “ di dn o tfo l l ow t h e Cal i fo rn i a Ru l es o f Pro fes s io n al Co n du ctfo r cl i en t tru s t acco un t s ”. Id . at* 1 6
. W e s ee n o reas o n t o s t ray fro m o ur an al y s i s i n Can at el l a. Pet i t i o ner rep eat ed l y

i g n o redth e ru l e 4 -1 0 0 l i m i t at io ns o n h i s co ndu ctan d affi rm at i v el y

m i s us edth e fu n d s h el di n an d g en erat edb y th e acco u n tfo r h i s- 4 3 -

[* 4 3 ] p ers o n al b en efi t . Pet it i o n er d i s reg ard edh i s cl ien t s ’ wi s h es an d d i rect edth at
o n ce t h e cl erg y

l aws u i ts et t lem en tfu n d s --wh i ch b el o n g edt o h i s cl i en t s--were d ep os i t edth ey

s h o u l db e i n v es t edi n au ct i o n rat e s ecu ri t i es . Ind o i n g s o , an d i g n o ri n g th e ru l e 4 -1 00 d irect i ve t hath i s fee b e rem o v edfro m th e UBS acco u n tas
s o o n as p o s s i b l e, p et i t io ner k ep th i s m on ey co m m i n gl edwi t h h i s cl ien t s’ m o n ey . On ce h i s cl ien t s ’ fu n d s were i n v es tedi n au ct i o n rat e s ecu ri t i es , p et i t i o n er d i rect ed th ata l arg e p o rt i on o f t h i s i n v es tm en tb e s o l dan dth en rep u rch as edth e fo l l o w i n g d ay

b ecau s e h e n eed edt o d em o n s t rat e p ers o n al l i qu i di t y . Vi o l at i n g ru l e 4 -1 0 0, p et i t i o n er s k i m

m edi n t eres tearn edatl eas ti n p arto n h i s cl i en t s ’ fu n d s fo r p ers o n al ex p en s es , i n cl u d i n g a g i fto f $ 5 0,0 0 0 t o h i s p ers o n al trai n er. Th i s co u rs e o f co n du cti n d i cat es th at , fro m th e m om en tp et i t i o n er
es t ab l i s h edth e UBS acco u n t, h e i n t en d ed t o u s e t h e fu n d s th erei n fo r h i s o wn b en efi t . On ce t h e cl erg y

l aws u i ts et t l em en tfu n d s were d ep os i t ed i n t o t h e acco u n t, h e d i d j u s t t h at . Ru l e 4 -1 0 0 d i dn o to p erat e as an y co n s trai n to n p et i t i o n er’ s u s e o f th e fu n d s fo r h i s o wnb en efi t . Acco rd i n g ly , ev en as s um i n g t here was a fee d i s p u t e b et ween h i m an dth e Bro t h ers , p et i t i o n er s h o u l dh av e reco gn i zedh i s as s ert edfees
as i n co m e fo r 2 0 0 7
. 2 0

2 0 Res p o nd en tu rg es u s t o co n cl u d e th atp et i ti o n er al s o s h o u ldh av e rep o rt ed h i s fee as i n co m e fo r 2 0 0 7 b ecau s e h e h ada cl ai m o f ri g h t t o t h e fu n d s i n th aty ear,

(co n ti n u ed ...)- 4 4 -

[* 4 4 ] II. Ci v i l Frau dPen al t y Sect io n 6 6 6 3 i m

p os es a 7 5 % p en al t y o n an y u n d erp aym en t o f t ax i f t h e
u n d erp aym en t i s due t o frau d. Sec. 6 6 63 (a). Th e Co m m i s s i o n er b ears th e b u rd en
o f p ro v i n g frau db y

cl ear an dco n v i n ci n g ev i d en ce, 2 1 s ee s ec. 7 4 54 (a), an dt o m eet

2 0 (...co n t i nu ed ) ev en if h i s cl i en t s h ada co u n terv ai l i n g cl ai m b ecau s e o f an al l eg ed d is p u t e. Un d er th e “ cl ai m

o f ri g h t” d o ct ri n e, a t ax p ay er m u s ttreat fu nd s recei v edas i n co m e “ ev en th o u g h th e reci p ien tm ay b e u n d er a co n t i ng en t o b l i g at i o n t o retu rn i tata l at er t i m e.” No rdb erg v . Co m m is s i o n er, 7 9 T.C. 6 5 5 , 6 6 4 (1 9 8 2 ), aff’ d wi t h ou t p ub l i s h edo p i n i o n, 7 2 0 F.2 d6 5 8 (1 s tCi r. 1 9 83 ). W e ap p l y th i s d o ct ri n e wh ere “ a t ax p ay er recei v es earn i n gs u n d er a cl ai m o f ri gh tan d wi t ho u tres t ri ct i o n as t o i t s d i s p o s i t i on * * * ev en t h o u g h i tm ay s t i l l b e cl ai m edth ath e i s n o ten t i t l edt o ret ai n th e m o n ey , an dev en th o u g h h e m ay s t i l l b e ad

ju d g edl i ab le t o res to re i t s equ iv al en t .” Id . at6 64 (qu o t i n g N. Am . Oi l Co n s o l. v
. Bu rn et , 2 8 6 U.S. 4 1 7 , 4 2 4 (1 9 3 2)). Acco rd i n gl y , “ [t ] h e m ere fact th at i n co m e recei v edb y a t ax p ay er m ay h av e t o b e ret u rn edats o m e l at er t i m e d o es n o td ep ri ve i to f i t s ch aract er as t ax ab l e i n co m e wh en recei ved .” W o o l ardv . Co m m is si o n er, 4 7 T.C. 2 74 , 2 79 (1 9 6 6 ). In s t ead , th ati n co m e m

u s tb e reco g n izedfo r t h e y ear i t i s recei vedan d, i f th e t ax p ay er l at er m

u s trep ay i t , th ere m ay

b e a d edu ct io n av ai l ab l e fo r a fu tu re y ear. E.g ., Ham l et tv . Co m

m i s s io n er, T.C. M em o. 2 0 0 4 -7 8
. W e n eedn o tru l e o n res p o n d en t ’ s arg u m en treg ard i n g th e cl ai m -o f-ri g h t d o ct ri n e. W e n o t e, h o wev er, thatp et i t i on er m ai nt ai n edh i s cl ai m o f a 6 0% fee th ro u g h ou th i s rep res en t at i o n , th e v ari o u s arb i t rat i o n an d i n t erp l ead er act i o n s , an d i n h i s t es t i m o n y

b efo re t hi s Co u rt . 2 1 Cl ear an dco n v i nci n g ev i d en ce i s “ t h atm eas u re o r d eg ree o f p ro o f wh i ch wi l l p ro du ce i n th e m i n do f t h e tri er o f fact s a fi rm b el i ef o r co nv i ct i o n as t o th e al l eg at i o n s s o u g h tt o b e es t ab l i s h ed . Iti s i n t erm ed i at e, b ei ng m o re t h an a m ere p rep o n d eran ce, b ut n o tt o the ex t en to f s u ch cert ai nt y as i s req ui redb ey o n da reas on ab l e d o ub tas i n cri m i n al cas es . It d o es n o tm ean cl ear an du n equ i v o cal .” Oh i o v . Akro n Ct r. fo r Rep ro d . Heal t h, 4 97 U.S. 5 0 2 , 5 1 6 (1 9 9 0 ) (qu o t i ng Cro s s v . Led fo rd , 1 2 0 N.E.2 d1 1 8 , 1 2 3 (Oh i o 1 95 4 )).- 4 5 -

[* 4 5 ] th atb u rd en m

u s ts h o w th at(1 ) an u n d erp aym en tex i s t s an d(2 ) t h e t ax p ay er i n t en d edt o ev ad e t ax es kno wnt o b e o wi n g th ro u g h co n ducti n t en d edt o co n ceal , m i s l ead , o r o th erwi se p rev en tth e co l l ect io n o f t ax es , s ee Sad ler v . Co m m i s s i o n er, 1 1 3 T.C. 9 9 , 1 0 2 (1 9 9 9 ). To p ro v e t h atan u n d erp aym en tex i s t s , th e Co m m i s s i o n er m

u s tp res en t
ev i d en ce b ey on dth e t ax p ay er’ s fai l ure t o p ro v e erro r i n t h e d efi ci en cy d et erm i n at i on b u tn eed n o tes t ab l i s h th e p reci s e am ou n to f t he d efi ci en cy . See Di Leo v . Co m m i s s i o n er, 9 6 T.C. 8 58 , 8 8 6 (1 9 9 1 ), aff’ d , 9 59 F.2 d 1 6 (2 d Ci r. 1 99 2 ). To p ro v e th atth e t ax p ay er i n t en dedt o ev ad e t ax es , th e Co m m i s s io n er m ay

rel y o n ci rcu m s t an t i al ev i d en ce b ecau s e frau di s rarel y p ro v ab le b y

d i rect ev i den ce al o n e. See Es t at e o f Tro m

p et er v . Co m

m i s s i o n er, 2 7 9 F.3 d7 6 7 , 7 7 3 (9 th Ci r. 2 0 0 2 ),
v acat i n g an drem an d i n g 1 1 1 T.C. 5 7 (1 9 9 8 ). Th e ex i s t en ce o f cert ai n b ad g es o f frau d al l ows a co u rtt o i nfer frau du l en ti n ten t . M aci el v . Co m m i s s io n er, 4 8 9 F.3 d 1 0 1 8 , 1 0 2 8 (9 th Ci r. 2 0 0 7 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o . 2 00 4 -2 8
. Res p o n d en tal l eg es th atth e fo ll o w i n g b ad g es are p res en tt o p ro v e frau du l en t i n t en t : (1 ) co n s i s ten t l y u n d ers t at i n g i n co m e; (2 ) fai l i n g t o m ai n t ai n ad equat e reco rd s ; (3 ) o fferi n g i m p l au si b l e o r i n co n s i s t en t ex p l an at i o ns ; (4 )
co n ceal i n g i n co m e o r as s et s ; (5 ) fai l i n g t o co o p erat e wi th au t h ori t ies ; (6 ) fi l i n g fal s e d o cu m en t s ; an d(7 ) p ro v id i n g fal s e t es t i m o n y . See Park s v . Co m m i s s i o n er,- 4 6 -

[* 4 6 ] 9 4 T.C. 6 5 4 , 6 6 4 -6 65 (1 9 9 0 ). W e co n s i d er t h es e i n di ci a i n the l i g h t o f t h e t ax p ay er’ s s o p h is t i cat i o n , edu cat i o n , an dex p eri en ce. Ni ed ri n g h au s v . Co m m i s s i o n er, 9 9 T.C. 2 02 , 2 1 1 (1 9 9 2 ). If t h e Co m

m i s s i on er es t ab l i s h es b y

cl ear an dco n v i n ci ng ev i d en ce t h ats o m e p o rt i on o f t h e u n d erp aym en t i s at t ri b u t ab le t o frau d , 2 2 th e en t ire u n d erp aym en ti s d eem edat t ri b u t ab l e t o frau d ex cep tt o th e ex t en tth at t he t ax p ay er can s h o w (b y a p rep o n d eran ce o f t h e ev i den ce) t h ata p art i cu l ar p o rt i o n i s n o t at t ri b u t ab l e t o frau d. See s ec. 6 6 6 3 (b ).

2 2 Res p o nd en tal s o b ears th e i n i t i al b u rd en o f p ro du ct i on reg ard i n g th e ci v i l frau d p en al t y

u n d er s ec. 6 66 3 . To m eetth i s b u rd en o f p ro du ct i o n , res p o n d en t m u sti n tro du ce ev i d en ce th ati ti s ap p ro p ri at e t o i m p os e t h e p en al ty

an dthat res p o n d en t’ s ag en t s co m

p l iedwi t h th e s up erv i s o ry ap p ro v al req u irem en t s i m p o s ed b y s ec. 6 7 5 1 (b )(1 ). See Cl ay v . Co m m is s i o n er, 1 52 T.C. 2 2 3 (2 0 1 9); Graev v . Co m m i s s i o n er, 1 4 9 T.C. 4 8 5 , 4 9 2 -4 9 3 (2 0 1 7), s up p l em en t i n g an d o v erru li n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ). Sec. 6 7 51 (b )(1 ) p ro v i d es th atn o p en al t y s h al l b e as s es s edu n l es s th e Co m

m is s io n er’ s ag en t s ecu res wri t t en s up erv i s o ry ap p ro v al b efo re t h e fi rs t fo rm al as s ert i o n o f th e p en al ty . Cl ay v . Co m m i ss i on er, 1 5 2 T.C. at 2 4 9 . Res p o n d en th as i n t ro du ceda Ci v i l Pen al t y Ap p ro v al Fo rm , s i gn edb y St ep h en Lep o re an dd at edAu g u s t 2 8 , 2 0 1 4 . M r. Lep o re s up erv i sedRev enu e Ag en tBern ardTrap p ’ s ex am i n at i o n o f p et i t i o n er’ s retu rn an d ap p ro v edth e as s ert i o n o f t he ci vi l frau dp en al t y i n wri t i n g b efo re i twas fi rs tfo rm al l y co m m u n icat edt o p et i ti o ner. Co n s equen t l y , we co n cl u d e t h atres po n d en th as m et h i s b u rd en o f p ro du ct i o n u n d er s ec. 6 75 1 (b ) as t o the s ec. 6 6 6 3 p en al t y d et erm i n ed i n the n o t i ce o f d efi ci en cy .- 4 7 -

[* 4 7 ] A. Un d erp aym en to f Tax Res p o n d en th as p ro v en b y cl ear an dco nv i n ci n g ev id en ce t h atp et i t i o n er
u n d ers t at edh i s i n co m e fo r 2 0 0 7 an dth ereb y u nd erp ai d h i s i n co m e t ax l i ab i l i t y . See s up ra p p . 2 5 -4 3 . Acco rd in g l y , res p o n d en t h as m eth i s b u rd en o f p ro v i n g b y cl ear an dco n v i n ci n g ev i d en ce t h atan u n d erp aym en tex i s t s fo r t h aty ear. See Di Leo v . Co m

m i s s i o n er, 9 6 T.C. at8 8 6
. B. Frau du l en tIn t en t As n o tedab o v e, we l o okt o s ee wh et h er p et i t i on er’ s co n du ct i m p l icat es an y
o f t h e b ad g es o f frau dt o d et erm i n e wh et h er p et i t i o n er u n d erp ai d h i s t ax l i ab i l i t y wi th frau du l en ti n t en t . W e co n cl u d e t h at res p on d en th as p ro v en b y cl ear an d
co n vi n ci n g ev id en ce t h at p et i t i o n er h adth ati n t en t . W e s t arto u r an al y s i s b y
reco g n izi n g p et i t i on er’ s h i g h l ev el o f s o p hi st i cat io n i n Fed eral t ax m at t ers , an d th en co n s i d er t h e p res en ce o f s ev eral rel ev an tb ad g es o f frau d.

1
. Pet i t i o ner’ s So p h i s t i cat i o n , Edu cat i o n , an dEx p eri en ce Pet i t i o ner i s far fro m

an o rd in ary

l i t i g an t. He h o ld s a l aw d eg ree, h e p ract i cedas a l i ti g at o r fo r o v er 3 0 y ears s p eci al i zi n g i n --am o n g o t h er areas --t ax frau d an dco n t ro v ers y

cas es , an dh e was ad m i t tedt o p ract i ce b efo re t h i s Co u rt b efo re h i s d i s b arm en ti n Cal i fo rn i a. W e h av e o ft enh el dth at a t ax p ay er’ s
ex p eri en ce wi t h Fed eral t ax m at t ers i s rel ev an tt o t h e an al y s i s o f t he p res en ce o r- 4 8 -

[* 4 8 ] ab sen ce o f frau du len ti nt en t . See Cry er v . Co m m i s s io n er, T.C. M em o . 2 0 1 3 -6 9 ; Fi o re v . Co m

m i s s i o n er, T.C. M em o . 2 0 1 3-2 1 ; Co o ley v . Co m m i s s i o n er, T.C. M em o . 2 00 4 -4 9 ; M cGee v . Co m m i ss i o n er, T.C. M em o . 2 0 0 0 -3 0 8 ; Beret t a v . Co m m i s s i o n er, T.C. M em o . 1 9 9 7 -5 7 0 ; Scal len v . Co m m i ss i o n er, T.C. M em o . 1 9 8 7 -4 1 2 , aff’ d, 8 7 7 F.2 d1 3 6 4 (8 t h Ci r. 1 98 9 ). W e can n o ti g n o re t he fact th at p et it i o n er ran a l aw fi rm s p eci al i zi n g i n t ax frau d d efen s e. Cf. Hat l i ng v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -2 9 3. Wh il e we d o
n o ti n fer frau du l en t i n t en to n th e b as i s o f p et i t i o ner’ s l eg al b ack g ro un dal o n e, h i s
ex p eri en ce n eces s ari ly

i nfo rm s o u r an al y s is o f h i s b eh av i o r an di n t en t . Acco rd Co l e v . Co m

m is s i o n er, 6 3 7 F.3 d7 6 7 (7 t h Ci r. 2 0 1 1 ), aff’ g T.C. M em o . 2 0 10 -3 1; Ro wel l v . Co m

m i ss i o n er, 8 8 4 F.2 d 1 0 8 5 , 1 0 8 8 (8 t h Ci r. 1 9 8 9 ), aff’ g T.C. M em o . 1 9 8 8 -4 1 0 . W i t h th is b ack g ro u ndi n m i nd , we co n si d er t h e p res en ce o r ab s en ce o f th e b ad g es o f frau d
.

2
. Co n s i s t en t Un d ers t at em en to f In co m e Co n si s t en t u n d ers t at em en to f i n co m e i s “ s t ro n g ev i d en ce o f frau d
. ” Ko reck y v . Co m m i ss i o n er, 7 8 1 F.2 d1 5 66 , 1 56 8 (1 1t h Ci r. 1 9 8 6 ) (qu ot i n g M erri t t
v . Co m m i s s i o n er, 3 0 1 F.2 d4 8 4 , 4 8 7 (5 th Ci r. 1 9 6 2 ), aff’ g T.C. M em o . 1 95 9 -1 7 2 ), aff’ g T.C. M em o . 1 9 8 5 -6 3 . A t ax p ay er wh o s ub s t an t i al l y an dco n s i s t en t ly
u n d ers t at es h i s i n co m e p ro v id es “ ev i d en ce o f frau dul en ti n ten tt o ev ad e t ax es ”- 4 9 -

[* 4 9 ] ev enwh ere t h e reco rdi s “ d ev o i do f t h e u s u al i n d ici a o f frau d”. Ot s u k i v . Co m m i s s i o n er, 5 3 T.C. 9 6, 1 07 -1 0 8 (1 9 6 9 ). Pet i t i o ner rep eat ed l y

u n d ers tat edh i s i n co m e o v er t h e co u rs e o f s ev eral y ears . To s t art , i n th e co u rs e o f t hi s cas e p et i t i o n er co n ced ed t h atfo r t ax y ear 2 0 0 8 h e h adcl ai m ed$ 8 31 ,1 54 i n i m p ro p er d edu ct i o n s an d fai l edt o rep o rt $ 1 4 0 ,0 0 0 i n l eg al fees as i n co m e. Pet i t i o n er fu rt h er co n ced edthatth e res u l t i n g
u n d ers t at em en to f i n co m e fo r 2 0 0 8 was frau du l en t . Fo r t ax y ear 2 0 0 6 p et i t i o n er
s t ip u l at edth ath e erro n eo u sl y rep o rt ed$ 8 13 ,0 0 0 i n l eg al fees as l i ab i l i t i es i n s t ead
o f as i n co m e. Fo r t ax y ear 2 0 0 5 p et i t io n er fi l eda Fo rm 1 0 4 0 rep o rt i n g o n l y $ 3 3 ,2 0 3 i n n etp ro fi t s fro m h i s l aw p ract i ce. Yetwh enh e o p en edth e UBS
acco u n t , p et i ti o n er rep res en t edt o UBS t h at h i s l aw p ract i ce earn ed h i m $ 7 5 ,2 1 2 o f
n etp ro fi t s i n t ax y ear 2 0 0 5
. Tak en t o g ether, an di n t h e l i g h to f p et i t i on er’ s b ack gro un dan dex p eri en ce, we fi n dthi s p at t ern p art i cu l arl y tro ub l i n g an d i n d i cat i v e o f frau du l en ti n t en t .

3
. Fai l u re To M ai n t ai n Ad equat e Reco rd s Al l t ax p ay ers are req u i redt o m ai n tai n reco rd s s u ffi ci en t t o d et erm in e wh et h er t h ey are l i ab l e fo r t ax , s ec. 6 0 0 1, an da fai l u re t o m ai n t ai n ad equ at e
reco rd s can s up p orta fi n d i n g o f frau du l en t i n t en t , s ee Brad fo rdv . Co m m i s s i o n er, 7 9 6 F.2 d3 0 3, 3 0 7 -3 08 (9 t h Ci r. 1 9 8 6 ), aff’ g T.C. M em o . 1 98 4 -6 0 1
.- 5 0 -

[* 5 0 ] Bo t h th e In t ern al Rev enue Co d e an d t h e Cal ifo rn i a Ru l es o f Pro fes s i o n al Co n du ctreq ui redp et i t i o n er t o m ai n t ai n ad equ at e fi n an ci al reco rd s . Ig n o ri n g h i s du al o bl i g at i o n, p et i t i o n er fai l edt o m ai n t ai n b o o k s an dreco rd s s u ffi ci en t t o cl earl y d i s t i n g ui s h fu n d s rep o rt ab l e as i n co m e an d fu n d s h el di n t ru st . Pet i t i o ner’ s i n ad equ at e reco rd k eep i n g was a ch ro ni c co n d i t io n . He was
s ub jectt o d i s ci p li n ary

p ro ceed i n g s b efo re t he St at e b ar i n Cal i fo rn i a fo u r s ep arat e t i m es --al l fo r o ffen s es rel at edt o fi n an ci al reco rd k eep i n g --t h e fo u rt h o f wh i ch
res u l ted i n d i sb arm en t . Aft er h i s s eco n dan d t h i rdd i s ci p l i naryact i o n s , th e St at e b ar req u i red p et it i o n er t o s at i s fact o ri l y co m p l et e an Eth i cs Sch o o l Cl i en tTru s t Acco u n tReco rd -Keep i n g Co u rs e an dh i re an o ut s i d e co n s u l t an tt o o v erh au l h i s
m an ag em en tan dreco rd k eep in g p ract i ces . Pet it i on er d i dn o ts u ffi ci en t l y up d at e h i s p ract i ces , h o wev er. In i t s d eci s i o n res p ect i n g p et it i on er’ s fo u rt h an d fi n al d i s ci pl i n ary

act i o n , th e St at e Bar Co u rto f Cal i fo rn i a--aft er an ex ten s i v e rev i ew o f p et i t i o n er’ s b u si n es s p ract i ces --d es cri b edp et i t io n er’ s reco rd k eep i n g as s t i l l b ei n g

“ wo efu l l y i n ad equat e,” “ lack ad ai s i cal ”, “ g ro s s l y m i s m an ag ed ”, an dri s i n g t o th e l ev el o f “ m o ral tu rp i tu de”. Ou r rev i ew o f t h e reco rdco n fi rm s t hes e o b s erv at io n s . Pet i t i o n er fai l edt o
m ai n t ai n ad equ at e reco rd s reg ard i n g h i s fi nan ci al d eal i n g s . As i trel at edt o h i s l aw p ract i ce, p et i t io ner m ai n t ai n edtwo s et s o f b o o k s . Bu t i n n ei t h er o f t h es e d i dh e- 5 1 -

[* 5 1 ] acco u n tfo r t h e fu n d s h el di n th e UBS acco u n t . Atal l rel ev an tt im es , p et i t i o n er as s ert edth ath e was en t i t l edt o 6 0 % o f t he fu n d s fro m th e cl erg y

l aws u it
s et t l em en th el di n th e UBS acco u n t , b u th e fai l edt o i n cl u d e t h e UBS acco u n ti n ei th er s eto f b o o k s . Th i s i s u nreas on ab l e an d , co n s i d eredi n th e l ig h t o f p et i t i o n er’ s co urt -o rd eredco u rs es an dco n s ul t an ten g ag em en t s t o i m pro v e h i s
reco rd k eep i n g , p oi nt s t o a p at t ern o f ev as i o n . W e fi ndth i s b ad g e i n d i cat es frau du l en t i n t en t .

4
. Offeri n g Im

p l au s i b le o r In co ns i s t en t Ex p l an at i o ns Im p l au s i b l e o r i n co n s i st en tex p l an at i o n s fo r a t ax p ay er’ s b eh av i or can i n d i cat e frau du l en ti n t en t . Id . at3 0 7
. Pet it i on er h as o ffered s ev eral m y s t i fy i n g
ex p lan at i o n s . To s t art , p et i t i on er’ s en t i re t h eo ry i n th i s cas e i s i n co ns i s t en twi t h h i s p o s i t i o n i n earl i er p ro ceed i n g s . As n o t edab o ve, h i s p o s i t i o n h ere i s s o i n co n s i s t en twi t h h i s earl i er p o s i t i o n s t hatwe fel tco m p el l ed t o es t o p h i s arg u m en t . Th i s i s a m at eri al i n co n s i s t en cy th ats t ri k es atth e h eart o f p et i t i o n er’ s co ndu ct reg ard i n g h i s Fed eral t ax o b l i g at i o n s . Bey o n d t h i s m o s ts eri o u s i n co n s i st en cy , p et it i on er h as o ffered m yri ado th er i m p l au s i b l e an di nco n s i s t en tex p l an at io n s fo r h i s fai l u re t o i n cl u d e h i s fees as i n co m e i n 2 0 0 7. Fo r ex am p l e, wh enh e fi l ed h i s 2 0 07 i n co m e t ax retu rn , p et i t i o n er cl ai m s , h e rel i edo n a p u rp o rt edt ax o p in i o n l et t er, b u tth e d o cu m en t was actu al l y a- 5 2 -

[* 5 2 ] m em o ran du m

p rep aredb y

a l eg al as s is tan tatp et i ti o n er’ s req u es t . Wh i l e rel i an ce o n a t ax o p i n i o n l et t er can b e reas o n ab l e, t h e fact s b el i e t h atn o t i on . Th e
m em o ran du m ’ s au t ho r h ad n o tp as s edth e b ar ex am i n at i o n an dh adl it t le
ex p eri en ce i n t ax l aw. Th e m em o ran du m i s fo ur p ag es l o n g . Its u m m ari zes --atthe h i g h es tl ev el o f g en eral i t y --t h e d o ct ri n e o f co n s t ru ct i v e recei p to f i n co m e, b u ti t p ro v id es l i t t l e t o n o m ean in g fu l d i scu s s io n o f th e p art i cu l ar fact s o f p et i t i o ner’ s
cas e. Wh ere t h e o p i n i o n d o es g rap p l e wi t h th e fact s, i td oes s o o n t h e b as i s o f fal s e an du nreas o n ab l e as s u m p t i o n s p ro vi d ed b y

p et i ti o n er. Its t rai n s credu l i t y t o th i n kth atp et i t i o n er m ean i n g fu l l y rel i ed up on th is ad v i ce--g iv en h i s o wn b ack gro un di n t ax l aw--i n t ak i n g h i s rep o rt i n g p o si t io n . Th i s m em o ran du m was a fi g l eaf co v eri ng p et i ti o n er’ s fai l u re t o rep o rth i s l eg al fees fo r th e y ear earn ed
. M o reo v er, p et i t i o n er rep eat ed l y t o l d t h e rev enu e ag en t du ri ng th e
ex am i n at i o n th atUBS h adi n v es t edth e cl erg y l aws u i ts et t l em en tfu n d s wi t h o u th i s
au th o ri zat i o n . He d i ds o n o t w i t h s t an d i ng th atth e Lo s An g el es Co u n ty Sup eri o r Co u rth adal read y h el dth at cl ai m t o b e “ fal se” an d“ cl earl y erro n eo u s ”. Pet i t i o n er
m ai n t ai n edth i s cl ai m , ev en tho u g h th atco u rtru l edth atex t en s iv e ev i d en ce
s ub m i t t edi n t h e FINRA ex pu n g em en tarb i t rat i o n h eari n g “ es t ab l is h [ed ] th atth e fu n d s were i n v es t ed at* * * [p et i t i o n er’ s ] d i rect i o n , fo l l owi n g d et ai l ed
co n vers at i on s wi t h h i m

co n cern i n g th e i n ves t m en t s .”- 5 3 -

[* 5 3 ] Gi v en th e fl ag ran ti n co n s i s t en cy o f p et i t i o n er’ s p o s i t i o n s , we co ncl u d e t h at th i s b ad g e s upp o rt s a fi n d i n g o f frau du l en ti n t en t.

5
. Co n ceal m en to f In co m e o r As s et s Co n ceal i n g i n co m e o r as s et s s up p o rt s an i n feren ce o f frau du len ti nt en t . Sp i es v . Un i tedSt at es , 3 1 7 U.S. 4 9 2 , 4 9 9 (1 9 43 ). As n o t edab o v e, p et it i on er d i d
n o tacco un tfo r t h e UBS acco u n ti n ei t h er o f h i s l aw fi rm ’ s g en eral l ed g ers . He d i dn o t i n fo rm h i s retu rn p rep arer ab o u tthe UBS acco u n t , h i s fee arran g em en t s , o r
an y p o t en t i al i n co m e d eri v ed fro m h i s l eg al s erv i ces i n th e cl erg y l aws u i t cas e. In th e l i g hto f t h e t o t al ci rcu m s t an ces , we fi n dth atthi s b ad g e s up p o rt s an i n feren ce
o f frau du l en t i n ten t .

6
. Fai l u re To Co o p erat e W i t h Au t h o ri t i es Refu s i n g t o co o p erat e, o r fai l i n g t o fu l ly co o p erat e, wi t h au t h o ri t i es du ri n g
an ex am i n at i o n can s upp o rtan i n feren ce o f frau du len ti nt en t . See Gro ss h an d l er v . Co m m i s s i o n er, 7 5 T.C. 1 , 2 0 (1 9 8 0 ). Fro m the s t arto f t h e ex am i n at io n , p et i t i o n er
s o u g htt o o b fu s cat e t he fact s reg ard i n g wh en h e earn edh i s fee i n th e cl erg y l aws u i t . Inres p o ns e t o an i n i t ial i n fo rm at i o n d o cu m en treq u es t , as n o tedab o v e, p et i t i o n er rep eat edth e l ie t h atUBS h adi n v es t edth e fu n ds wi t h o uth i s p erm i s s i o n . Si m i l arl y , p et i ti o n er h as m ai n t ai n edb efo re th is Co u rtth ata fee d is p u t e ex i s t ed b et ween h i m an dh i s cl i en t s du ri n g 2 0 0 7 , ev en th o u g h th e Lo s An g el es Co u n t y- 5 4 -

[* 5 4 ] Sup eri o r Co u rtfo u n d --o n p et i t i o n er’ s ev id en ce--t h at n o s u ch d i s p u t e
ex i s t ed . Th es e t wo s t at em en ts were u n s upp o rt ab l e wh enm ad e an drei n fo rce a fi nd i ng o f p et i t i o n er’ s frau du l en ti n ten t .

7
. Fi l i n g Fal s e Do cu m en ts Fi l i n g fal s e d o cu m en t s wi t h th e In t ern al Rev en ue Serv i ce o r wi t h th i rd p art i es s up p o rt s an i n feren ce o f frau du l en t i n t en t . As p arto f t h e FINRA arb i trat i on , p et i t i o n er p ro du ceda p u rp o rt edco p y o f h i s 2 0 0 9 i nco m e t ax retu rn th atd i d n o tm at ch wh ath e actual l y fi l edwi t h th e IRS. Th e p u rp ort edretu rn p ro duced i n t h e co u rs e o f t he FINRA arb i t rat io n was , i n a wo rd , frau du l en t . M o reo v er, p et i t i o n er h as co n ced edth atth e i n co m e t ax retu rn h e fi l edfo r t ax y ear 2 0 0 8 was kn o wi n g l y fal s e. In t h e l i g h to f p et i t i o n er’ s p at t ern o f ev as i v en es s an d h i s s o p h i s t icat i o n , th i s b ad g e i n d i cat es frau du l en ti n t en t .

8
. Fal s e Tes ti m o n y Pro v i d i n g fal s e, ev as iv e, o r o t h erwi s e i n co n s is t en tt es t im o n y s up p ort s an i n feren ce o f frau du l en t i n t en t . See Lau ri ns v . Co m m is s i o n er, 8 89 F.2 d 9 1 0 , 9 1 3 (9 th Ci r. 1 9 8 9 ), aff’ g No rm an v . Co m m i s si on er, T.C. M em o . 1 98 7 -2 6 5 . Pet i t i o n er
co n si s t en t l y

p ro v id edd em o n s t rab l y

fal se t es t i m on y

b efo re th i s Co u rt . Fo r i n s t an ce, h e t es ti fi ed t h att o s ecu re t h e cl erg y l aws u i ts et t l em en th e “ actu al l y h ada tri al .” Th e reco rd d em o ns t rat es , h o wev er, t hatth e cl erg y l aws u i tcas e s et t l edas- 5 5 -

[* 5 5 ] p arto f t h e Arch d i o ces e o f Lo s An g el es ’ g lo b al s et t l em en t an d t h atth e
s et t l em en tp et i t i o n er s ecu red fo r h i s cl i en ts was al l o cat eddu ri n g an i n fo rm al
co n feren ce. As a l i ti g at o r wi t h d ecad es o f ex p eri en ce, p et i t i o ner can s u rel y d i s t i n gu i sh b et ween a t ri al an da s et tl em en t co n feren ce. Pet i t i o n er al s o fal s el y t es t i fi edas t o h i s cen t ral th eo ry o f t h i s cas e--t h ata fee d i s pu t e ex i st edb et ween h i m s el f an dth e Bro t h ers . See s up ra p p . 3 4 -3 8 , 5 1 -5 2 . Th es e are b u ttwo
ex am p l es o f m an y

wh ere p et i t io n er p ro v i d edfal se an dev as i v e t es ti m o ny ; each p o i n t s t o frau du len ti n ten t . In s h o rt , al l rel ev an tb ad g es o f frau ds up p o rtan i n feren ce o f frau du l en t i n t en t , s o we d raw t h ati nferen ce. III. Co n cl u si o n W e co ncl u d e t h at p et i ti o n er h as fai l edt o carryh i s b urd en t o p ro v e th e d et erm i n at i o n refl ect edi n th e n o t i ce o f d efi ci en cy i s i n co rrect an dth atres p o n d en t h as carri edh i s b u rd en reg ard i n g th o s e i n creas ed d efi ci en ci es as s ert edas n ew
m at t ers i n h i s an s wer. W e fu rt her co ncl u d e t hatres po n den t h as p ro v en , b y cl ear
an d co n v i n ci n g ev i den ce, t h atp et i t i o n er u n d erp ai d h i s i n co m e t ax an dd i ds o wi t h frau du l en t i n t en t . M o reo ver, p et i t i o n er h as i n t ro du cedn o ev i d en ce t hatwo u l d
s up p orta fi n d i n g t h atan y p o rt i o n o f t h e u nd erp aym en ti s n o tat tri b ut ab l e t o frau d
.- 5 6 -

[* 5 6 ] Th erefo re, we co n cl u de t h atth e en t i re u n d erp aym en ti s at t ri b u tab l e t o frau d wi th i n th e m ean i n g o f s ect i on 6 6 63
. In reach i n g o u r d eci s i o n , we h av e co n s id eredal l arg u m en t s m ad e, an d , t o th e ex t en tn o t m en t io n ed ab o v e, we co n cl u d e t h ey are m o ot , i rrel ev an t , o r wi t h o u t
m eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r
res p o nd en t .