Feld, Lawrence S.

Rosenblatt, Leonard R.

English

New York Law School’s Digital Commons@NYLS

DigitalCommons@NYLS Articles & Chapters Faculty Scholarship 9-1985 Lawyer Beware: The Use of Counsel's Statements as Evidence against His Client in Tax Fraud Cases Lawrence S. Feld Leonard R. Rosenblatt Follow this and additional works at: https://digitalcommons.nyls.edu/fac_articles_chapters  Part of the Criminal Law Commons, and the Tax Law Commons Lawyer Beware: The UseOf Counsel's StatementsAs Evidence Against His ClientIn Tax Fraud CasesBy LAWRENCE S. FELD and LEONARD R. ROSENBLATTAccording to the authors, in criminal tax cases,in view of the language of the power ofattorney and the multiple opportunities for thepractitioner to make statements to governmentrepresentatives during the investigation orthe administrative review process, extremecare must be taken to avoid making statementsthat may be used as evidence against thetaxpayer. Lawrence S. Feld is a partner inthe law firm of Kostelanetz & Ritholz in NewYork City. Leonard R. Rosenblatt is an attorneyspecializing in criminal and civil tax litigationin New York City.0 1985, Lawrence S. Feld and Leonard R. RosenblattAmong the hazards that a tax practitionerfaces in representing a client during a tax fraudinvestigation is the danger that statements madeby the attorney to government representativesduring the investigation or the administrativereview process within the Internal RevenueService and the Department of Justice may beused as evidence against the taxpayer. The fewreported cases on this subject support the ad-missibility of such statements by counsel as evi-dence against the taxpayer at the trial of thecriminal tax case. Since there appears to be agrowing tendency on the part of the Departmentof Justice to offer such statements as part ofthe government's proof at trial, it is essentialthat the tax practitioner be keenly aware thathis advocacy of the taxpayer's cause before trialpossesses the potential of being converted into aninstrument for his client's conviction.Administrative ConferenceProceduresCriminal tax investigations and prosecutionsare unique in certain respects. Perhaps the singlemost special aspect of a criminal tax case is theadministrative conference procedure. Generally,taxpayers are afforded three conference opportu-nities before a case is referred to the local UnitedStates Attorney's Office for presentation to aTAXES-The Tax Magazine September, 1985618grand jury and indictment. Those conferencesare conducted by the Criminal Investigation Di-vision of the local IRS district, the correspond-ing Office of District Counsel, and the CriminalSection of the Tax Division of the Departmentof Justice in Washington, D. C.1From the government's viewpoint, the con-ferences have two purposes: (1) to provide thetaxpayer, or his authorized representative, withsome limited information concerning the pro-posed prosecution and (2) to provide the tax-payer with an opportunity to explain why theprosecution should be avoided. From the defenselawyer's viewpoint, the conferences may offer anopportunity to gain some insight into the govern-ment's case and ascertain the "theory" of prose-cution. However, many practitioners regardthese conferences as opportunities to provide theIRS or Justice Department with factual materialto defend questioned transactions or to challengethe accuracy of the government's evidence.Practitioners who are not familiar with theprocedures and possible pitfalls of these confer-ences may be eager to make representations offact and advance arguments of fact and law asto why the taxpayer should not be prosecuted.On occasion, these statements and argumentsmay convince the IRS or Justice Department toabandon the criminal case. But there should bea keen awareness that statements made by well-intentioned practitioners during these conferencesmay ultimately be used against the taxpayer andperhaps provide the critical element of proof inan otherwise weak government case.Agency and Scope of EmploymentStatements of attorneys at pre-indictmentconferences have been admitted into evidenceagainst taxpayers as an exception to the hearsayrule.2 Under the Federal Rules of Evidence, astatement is not hearsay if it is made "by [aparty's] agent or servant concerning a matterwithin the scope of his agency or employment,made during the existence of the relationship."In essence, under Rule 801(d)(2)(D), a state-ment by an agent concerning a matter withinhis or her employment is deemed to be a state-ment, or admission, by his or her principal.In several cases the courts have indicatedthat attorneys are "agents" of their clients forpurposes of this rule. For example, in UnitedStates v. Margiotta,3 the mail fraud and extortionprosecution of the Chairman of the Nassau CountyRepublican Committee, the Court of Appeals forthe Second Circuit, in broad and troubling terms,cautioned that statements "made by an attorneyconcerning a matter within his employment maybe admissible against the party retaining the at-torney."In criminal tax cases, where the issues of theattorney's "agency" and "scope of employment"are addressed in the power of attorney requiredby the IRS, taxpayers generally have been un-successful in excluding the admission of suchstatements. In two decisions, United States v.Dolleris,4 and United States v. O'Connor,5 the Courtsof Appeals stressed the importance of the lan-guage contained in the IRS power of attorneyin sanctioning the admission of statements oftaxpayers' attorneys.In O'Connor, a failure-to-file prosecution, thetaxpayer's attorney, acting under a power ofattorney, attended an administrative conferencewhere he admitted to IRS officials that his clienthad lied to them when the client insisted that hehad filed his tax returns. In affirming the tax-payer's conviction, the First Circuit sustainedthe admission at trial of the attorney's statementsand rejected the taxpayer's argument that hisattorney had exceeded the scope of his authority.Whatever question the appellate court may havehad about the scope of the attorney's authoritywas answered by the power of attorney, whichstated that he had "full power and authorityto do and perform all and every act or thingwhatsoever required and necessary" in matterspertaining to federal taxes.Similarly, in Dolleris, a tax evasion prosecution,an attorney's statements to IRS officials regard-ing the disposition of the cash proceeds of un-reported scrap sales were admitted at trial againstthe taxpayer. The Dolleris court also stressedthe broad wording of the power of attorney inrejecting the taxpayer's argument of lack ofauthority.Power of AttorneyWith a power of attorney on file with theIRS, a taxpayer will be hard pressed to arguethat his attorney's statements were unauthorized.The typical power of attorney (Form 2848) pro-vides:' See, generally, Fink, Tax Fraud, § 6.01.'Rule 801(d) (2) (D), Federal Rules of Evidence.'662 F. 2d 131, 142-43 (CA-2 1981).4 69-1 usTrc jf 9289, 408 F. 2d 918 (CA-6), cert. denied,395 U. S. 943 (1969).'70-2 us'rc 9649, 433 F. 2d 752 (CA-l), cert. denied,401 U. S. 911 (1970).TAXES-The Tax MagazineSeptember, 1985The attorney(s)-in-fact (or either of them)are authorized, subject to revocation, to re-ceive confidential information and to performany and all acts that the principal(s) canperform with respect to the above specifiedtax matters....One can hardly imagine a broader authorization.The particular language of the power ofattorney is probably not determinative of theissue of whether the attorney's statements werewithin the scope of his authority. While it is cer-tainly evidence of authority, express authoriza-tion as broadly worded as the provision quotedabove may even be unnecessary to bind the tax-payer under the current Federal Rules of Evi-dence. Whereas the common law rule, underwhich O'Connor and Dolleris were decided, madethe admissibility of such statements dependentupon whether the statements were within thescope of the agent's employment, the currentrule looks to whether the statement concerns amatter within the scope of the agent's employ-ment. As such, Rule 801(d) (2) (D) substantiallybroadened the traditional rule. As Chief JudgeJack B. Weinstein of the United States DistrictCourt for the Eastern District of New York hascommented:Once agency, and the making of the state-ment while the relationship continues areestablished, the statement is exempt fromthe hearsay rule so long as it related to amatter within the scope of the agency.6Compromise NegotiationsTaxpayers faced with the offer of statementsmade by their attorneys have advanced severalarguments against admissibility. Some taxpayershave attempted to argue that the statements areinadmissible under Rule 408 of the Federal Rulesof Evidence, which excludes evidence of offersin compromise However, taxpayers seeking toexclude statements under Rule 408 must over-come two obstacles. First, conferences with Spe-cial Agents and District Counsel attorneys arenot generally understood to be "compromise ne-gotiations." In fact, neither Special Agents norDistrict Counsel attorneys have the authority tocompromise a criminal case. As one court hasnoted:. . . after a Special Agent of the CID isassigned, the taxpayer will at most be al-lowed to come in, and will be listened to,but no negotiations will be engaged in untilafter the investigation has been completed,and the internal reviews that follow haveresulted in a decision (arrived at unilaterallyby IRS and not by negotiation) not to referto the Department of Justice. The conse-quence of this is that compromises can onlybe negotiated in cases where IRS has decidednot to refer.8Second, most conferences with Special Agentsand District Counsel attorneys begin with theadmonition that plea bargaining, civil settlement,negotiation and compromise will not be consid-ered or discussed. In view of this warning, itwould be extremely difficult, if not impossible,to argue that the taxpayer's attorney mistakenlybelieved himself or herself to be engaged in acompromise discussion.With respect to conferences before the TaxDivision of the Department of Justice, the con-feree attorney may very well have the authorityto "compromise" a criminal case. However, asin District Counsel conferences, defense attor-neys at Tax Division conferences are customarilyadvised that plea bargaining and civil settlementwill not be discussed.Statements Made During PleaDiscussionsOther taxpayers have argued that such state-ments are inadmissible under Rule 410 of theFederal Rules of Evidence, which excludes state-ments made during plea discussions with prose-cuting attorneys. With respect to statementsmade to Special Agents and District Counselattorneys, Rule 410 is not applicable becauseneither are attorneys for the prosecuting autho-rity, i. e., the Justice Department. With respectto statements made to Department of Justice per-sonnel, the warning that plea bargaining will notbe discussed will usually preclude a taxpayer'sreliance on Rule 410.Unauthorized StatementsAnother approach to the exclusion of suchstatements is to argue that they were in factunauthorized. However, since such statementsneed only "concern" a matter within the scopeof employment to satisfy Rule 801(d) (2) (D),14 Weinstein's Evidence, 1 801(d)(2)(D)[01], p. 801-162.,E.g., Tony Abatti, CCH Dec. 35,444(M), 37 TCM1597 (1978), rev'd and remanded, 81-1 USTC ir 9442, 644F. 2d 1385 (CA-9)." United States v. Garden State National Bank, 79-Iusrc r 9262, 465 F. Supp. 437, 439 (D. N. J.),- aff'd onother grounds, 79-2 usrc ff 9632, 607 F. 2d 61 (CA-3).TAXES-The Tax Magazine September, 1985620the taxpayer would have to show that the specificstatement did not concern his employment. Ifthe attorney was retained, as is usually the case,to conduct the defense according to his own bestjudgment, it seems that such statements, even ifthey are later used as evidence against the tax-payer, are admissible. For example, the Dolleriscourt rejected the argument that the attorney'sadmission of his client's misconduct was unau-thorized as follows:The attorney may well have thought that anexplanation for the motive for his client'smisconduct would constitute, over all, a netgain in the eyes of the Service, which alreadyappeared to believe that the misconduct hadoccurred. It was clearly within the powerand duty of the attorney to do what he could,in his own best judgment, to dispel the sus-picions of the Internal Revenue Service andavoid indictment.9Under this rationale, it seems likely that state-ments of counsel, even if they amount to a com-plete confession, will be considered by the courtsto be authorized statements.PolicyDespite the lack of success with which thesearguments have met, there are substantial policyreasons why such statements should be excluded.First, the importance that a jury may place onthe statement of a taxpayer's former lawyer maybe unduly prejudicial. If a jury were to hear,for example, that the defendant's former lawyeradmitted that unidentified deposits were "skimmed"business receipts, a jury may place less impor-tance on other available evidence tending toestablish a valid legal defense.Moreover, the admission of an attorney'sstatements will undoubtedly result in the con-sumption of additional trial time to explore thecircumstances under which the statements weremade and the reasons why they were of signifi-cance at that time. These matters will divert thejury's attention from the government's burdenof proving all the elements of the particularcrime with which the defendant has been charged.In addition, a defendant faced with the ad-mission of such evidence may have to choosebetween calling his former lawyer as a witnessto explain his statements, thereby possibly waiv-ing the attorney-client privilege, or taking thewitness stand himself, thereby risking cross-ex-amination as to a prior criminal record or "simi-lar act" evidence.Suggested SolutionsOne suggested solution to the problem hasbeen to modify the language of the power ofattorney to specifically exclude the authority tomake factual admissions. By this modification,it is hoped that a trial court will be compelledto exclude statements made under the power ofattorney as being unauthorized. However, therecan be no assurance that the IRS will accept apower of attorney modified in this fashion. More-over, the benefit of the suggestion may be illu-sory, since an attorney who provided the IRSwith any factual information under such a powermay subject himself to criticism or even disci-plinary proceedings for having made an unau-thorized disclosure on behalf of a client.Another suggestion has been to refrain frommaking factual assertions and instead presentall assertions of fact in hypothetical terms. Inthis fashion, it is hoped that whatever statementsare made will be excluded as mere argument.While this approach may be helpful, cautionmust be exercised to prevent later disputes overwhat information was presented as "fact" andwhat as "argument." Moreover, the possibilityexists that even a hypothetical assertion of fact,if determined by subsequent investigation to bematerially false or misleading, may be admissibleagainst a taxpayer at trial on the theory that itconstitutes evidence equivalent to a false excul-patory statement.10 Research has failed to locateany authority regarding the admissibility of suchhypothetical statements.ConclusionIn any criminal case, the decision to makefactual representations should be approachedwith extreme caution. In criminal tax cases, inview of the language of the power of attorneyand the multiple opportunities to make state-ments, extreme care must be taken to avoidmaking such statements and to insure that anystatements made will not prejudice the client. 09433 F. 2d at 756.1" See, e. g., United States v. Wilkins, 67-2 USTC 9739,385 F. 2d 465, 472 (CA-4), cert. denied, 390 U. S. 915(1968) ("Subsequent acts of a defendant, such as thefabrication of evidence or false explanations which willaid his defense, are clearly admissible to prove his guiltystate of mind.").TAXES-The Tax MagazineSeptember, 1985

Lawyer Beware: The Use of Counsel\u27s Statements as Evidence against His Client in Tax Fraud Cases

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Lawyer Beware: The Use of Counsel\u27s Statements as Evidence against His Client in Tax Fraud Cases

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