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Blinders Won’t
Hide The Elephant
Divorce and Tax Fraud : 10 Sheridan Myths Exposed
by: Charles C. Abut, Esq - July
2008
New Jersey Family Law judges and
lawyers learned much from Sheridan v. Sheridan, 247 N.J. Super.
552 (Ch. Div. 1990). In Sheridan, the court ruled that where
evidence establishes intentional tax evasion, a judge must
report such wrongdoing to the appropriate authorities.
The teaching of Sheridan remains
clear and beyond dispute. Nevertheless, the ensuing 18 years of
New Jersey matrimonial practice have led to various evasions,
half-truths and massive denial, mostly leading to a “Don’t Ask,
Don’t Tell” gestalt. This article suggests that putting on
blinders will not hide the elephant in the room.
Actually, prudent matrimonial
practitioners would be wise to construe Sheridan in the
post-Enron climate of placing greater burdens on lawyers to
report Acrimes”. Moreover, the present legal-ethical-moral
environment is not likely to dissipate soon, especially after
the current finger-pointing taking place in the subprime
maelstrom roiling the financial markets.
The following 10 myths illustrate
received illusions (delusions?) regarding Sheridan cases.
Myth #1: The failures to
file tax returns or to pay taxes are only civil offenses, not
crimes.
Fact: “Any person, who willfully fails to pay such estimated tax
or tax, make such return, keep such records, or supply such
information, at the time or times required by law or
regulations, shall, in addition to other penalties provided by
law, be guilty of a misdemeanor and, upon conviction thereof,
shall be fined not more than $25,000 ($100,000 in the case of a
corporation), or imprisoned not more than 1 year, or both,
together with the costs of prosecution.” 26 U.S.C.§7203.
Myth #2: Legal ethics have
no bearing on Sheridan issues.
Fact: Under the New Jersey Rules of Professional Conduct: (1) A
lawyer shall not counsel or assist a client in conduct that the
lawyer knows is illegal, criminal or fraudulent, (2) A lawyer
shall reveal such information to the proper authorities, as soon
as, and to the extent the lawyer reasonably believes necessary,
to prevent the client from committing a criminal, illegal or
fraudulent act that the lawyer reasonably believes is likely to
result in (a) death or substantial bodily harm, (b) substantial
injury to the financial interest or property of another, or (c)
a fraud perpetrated upon a tribunal, and (3) A lawyer shall not
knowingly make a false statement of material fact or law to a
third person or fail to disclose a material fact.
Myth #3: Prosecuting
authorities, such as the Department of Justice and the Internal
Revenue Service, have no interest in pursuing mere
unreported/under-reported income cases.
Fact: In Boulware v. United States, 380 U.S. 343 (2008)(March 3,
2008), The controlling shareholder of a closely held corporation
was convicted for criminal tax evasion and filing false income
tax returns. The defendant pleaded guilty to tax evasion,
resulting in a $228,000 deficiency. Although the District Court
imposed a below-guidelines sentence of 250 hours of community
service, three years of probation, a $250,000 fine and in-house
alcohol abuse treatment, the Third Circuit deemed this
inadequate. Because the sentence was unreasonable, it was
rejected and remanded for resentencing.
Myth #4: Sheridan only
applies to divorce cases.
Fact: In commercial litigation arising from breach of an
employment contract, the trial court interrupted cross-
examination to warn continued testimony could result in a
criminal referral. The Appellate Division cited Sheridan with
favor and emphasized that judges have a duty to report
intentional misrepresentation of income. All Modes Transport
Inc. v. Hecksteden, 389 N.J. Super. 462 (App. Div. 2006).
Myth #5 : Once a Marital
Settlement Agreement is signed and all assets have been
distributed, there is no after-the-fact Sheridan exposure.
Fact: “There is no contention that any term of the PSA violated
any law, any expression of public policy endemic to family
disputes generally, failed to protect the best interests of the
children, or fostered non-disclosure of the family’s affairs to
appropriate taxing authorities. Under these circumstances, we
discern no standard of attorney care that was breached.” Lerner
v. Laufer, 359 N.J. Super. 201 (App. Div. 2003).
Myth #6: The
attorney-client privilege provides lawyers with complete
Sheridan protection.
Fact: From State v. Ray, 372 N.J. 496, 500 (2004): “Public
policy considerations have led the courts and legislature to
include limited exceptions to the attorney-client privilege.”
From Fellerman v. Bradley, 99 N.J. 493, 502, 493 A.2d 1239
(1985): “The crime or fraud exception expressly provides such
privilege shall not extend...to a communication in the course of
legal service sought or obtained in aid of the commission of a
crime or a fraud. N.J.S.A. 2A:84-20(2)(a); N.J.R.E. 504(2)(a).
This exception is a statutory recognition of a situation in
which the purpose of the privilege would not be served by its
enforcement. A lawyer cannot be properly consulted
professionally for advice to aid in the perpetration of a fraud
on a court. The claim of privilege is that of the client and a
fraudulent object or purpose puts him beyond the scope of this
protection.”
Myth #7: Binding
arbitration is a safe way to deal with Sheridan problems
Fact: “An Arbitrator should withdraw from the process if the
Arbitration is being used to further criminal conduct.” [http://www.jamsadr.com/welcome/arbitration.asp)]
Myth #8: A New Jersey
mediation is a safe haven for Sheridan offenses.
Fact: “There is no privilege for a mediation communication that
is.. a threat or statement of a plan to inflict bodily injury or
commit a crime; or intentionally used to plan a crime, and there
is no privilege if the mediation communication is sought or
offered in a court proceeding involving a crime.” N.J.S.A.
23:C-6, New Jersey Uniform Mediation Act.
Myth #9: After the Statute
of Limitations has expired, there is no Sheridan problem.
Fact: When a taxpayer files a fraudulent tax return and later
files a non-fraudulent amended return, prosecution may take
place at any time, regardless of whether more than three years
have expired since the filing of the amended return, based on
the authority of §6501(c)(1) of the Internal Revenue Code.
Badaracco v. Commissioner, 464 U.S. 386 (1984).The statute of
limitations for the IRS to assess and collect any outstanding
balances does not start until a return has been filed. In other
words, there is no statute of limitations for assessing and
collecting the tax if no return has been filed.
Myth #10: Even when there
are Sheridan issues, an innocent
spouse will be exonerated.
Fact: The wife was not eligible for the benefits of Innocent
Spouse treatment under Internal Revenue Code Section 6015. Thus,
the tax penalties, interest and liabilities in question were not
solely attributable to the husband. The wife was deemed to have
had actual knowledge of the understatements of income. This was
because she was college-educated, she had access to the parties=
joint bank accounts, she balanced the parties checkbook, she
admitted to her status as a member of the parties= Limited
Liability Partnership, and she failed to satisfy her duty to
make diligent inquiry. Golden et us. v. Commissioner, TC Memo
2007-299 [2007].
Based on the foregoing, those who
ignore Sheridan do so at their peril. Furthermore, additional
Sheridan urban legends should now be laid to rest. These include
the fanciful notion that Sheridan can only be triggered when
live testimony is adduced in open court. And what of other sworn
proofs, such as answers to interrogatories, deposition
transcripts and certifications or affidavits? Nothing in
Sheridan limits its applicability only to courtroom testimony.
Nothing in Sheridan excludes other evidence provided under oath.
To believe otherwise is to engage in contorted legal sophistry,
or denial, or both. Another anecdotal fable is that Sheridan
will not apply to fraudulent tax returns, if those returns are
not actually entered into evidence. But this is a transparent
ploy, precisely because the falsity of the returns can be shown
in other indirect ways.
In the final analysis, why such
hyper-sensitivity to Sheridan cases? The answer does not emanate
from a holier-than-thou stance. Consider these 4 ideas:
- Sheridan offenders are
either criminals or stand to be prosecuted as such;
- Some charged with crime wind
up getting indicted, prosecuted or convicted. When they do,
some will say anything to exculpate themselves. This may
include perjury; it may include Aratting out” their
attorney, or their arbitrator, or their mediator;
- Without subjective value
assessments about Sheridan offenders, each attorney=s choice
should focus on intelligent decisions and personal risk
assessment. Certainly, the reader is free to see it
otherwise; and
- When a Sheridan offender
gets indicted, a lawyer, mediator or arbitrator might be
named as a co-defendant for Aaiding and abetting”. Is this
overly protective of one=s ass[ets]? Maybe. The reader may
well act differently with her/his own ass[ets].
Someday, the Supreme Court of New
Jersey may speak to these issues. Will it conclude that New
Jersey mediations and arbitrations are safe harbors for tax and
other crimes? Until then, New Jersey lawyers confronted with
Sheridan issues can carefully assess (a) their role as officers
of the court, (b) the New Jersey Rules of Professional Conduct
and (c) the risk/reward ratio. Only then should they proceed,
based on their own individual comfort levels.
Charles C. Abut practices in
Hackensack and Springfield. He has been designated by the New
Jersey Supreme Court as a Certified Matrimonial Attorney from
1998-2008, and as a certified civil trial attorney from
1984-1998. He is also a fellow of the American and International
Academies of Matrimonial Attorneys.
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