Originally Published on forbes.com on April 3rd, 2012
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When I was young, if a person knew the name of only one lawyer, that lawyer was probably F. Lee Bailey. I remember once taking a phone call at 1:00 AM from someone wanting to talk to the general manager of the hotel where I was working. When you called the hotel at 1:00 AM the only person you would ever get to talk to was the night auditor, who in a 140 room hotel would also run the front desk and answer the phone on third shift, so that was a ridiculous request. The angry caller informed me that he was going to sue the hotel and he was hiring F LEE BAILEY ! I knew at the time that F. Lee Bailey was famous for being a criminal defense attorney. It was guys like this that needed him
Probably if that caller ever received a 90 Day Letter from the IRS. He would make an angry phone call in which he would let the responsible agent know that he was going to hire F. LEE BAILEY ! to represent him in Tax Court. That would be mere rhetoric or fancy, though like the counting sheep hiring Mr. Bailey to represent them against Serta mattresses.
Seriously, would anybody actually get F. Lee Bailey to represent him in Tax Court ? You want a tax litigator to represent you in tax court. Who would want F. Lee Bailey ? And why would F. Lee Bailey choose to take on a tax case ? As it turns out, there is one person who not only wanted F. Lee Bailey to represent him, but could actually persuade F. Lee Bailey to take the case. The client in the case was F. Lee Bailey.
The proverb is that an attorney who represents himself has a fool for a client. The import of the proverb is that picking yourself to be your own attorney is a foolish choice. Now the decision in the case is on the long side and there are a number of complicated issues. It was not a total win for either Mr. Bailey or the IRS. Overall, I am not sure that the proverb was actually proved out in this case. I don’t know that many tax litigators would have done a lot better with the mess that Mr. Bailey’s difficult client dumped on him. It may well be that his actual foolishness might not have been so much in acting as his own lawyer as in the attempts he made to act as his own accountant. The case could actually form the basis of a novel, so I probably won’t do it justice, but here are some highlights.
Where Bailey Won – Kind Of
The big issue in the case concerns Mr. Bailey’s handling of client funds. It is rather on the convoluted side. Claude DuBoc had entered into a plea agreement with the United States in a marijuana smuggling case. His sentence was dependent, in part, in how much property the Government was able to seize from him. Thus it was in his interest to facilitate seizures, which were complicated by legal, diplomatic and practical difficulties. In order to address these issues:
the Government entered into a vague and unusual agreement with Mr. Bailey, under which Mr. Bailey would perform services to facilitate Mr. Duboc’s forfeiture of his assets, and Mr. Duboc would transfer 602,000 shares of Biochem Pharma stock to Mr. Bailey, to provide funds that Mr. Bailey could use to maintain and transfer Mr. Duboc’s foreign assets. Thomas Kirwin, an Assistant U.S. Attorney who worked for the Government on the Duboc case (and who later became a U.S. Attorney) testified at trial that the Duboc case was important and complex and that the nature of the work that Mr. Bailey undertook to do was “extraordinary”. Nonetheless, the agreement was completely unwritten.
That brings in my favorite legal proverb – Verbal contracts are not worth the paper they are printed on. Like “fool for a client”, the verbal contract proverb probably does not hold up in this case. The verbal contract did prove to be worth something. The Government had issues with how Mr. Bailey handled the funds, which resulted in two lawsuits and his spending 44 days in jail for contempt. So the IRS wanted to tax him on the value of the stock at the point that he received it. Because of the agreement the Tax Court ruled that he received the stock as a trustee and was only taxed when and to the extent that he converted funds to his personal use. When the Tax Court rules it does not keep score. It calls the strikes and balls and sends the IRS and the taxpayer back to recompute. Of the over four million in deficiency, though, that issue seemed to be worth about half. So I think we can give Mr. Bailey pretty high marks for his first foray into tax litigation.
On the other hand, he had borrowed against the stock, which the Tax Court did not find to be a taxable event, but when fees from other cases were used to pay down the debt, those fees were taxable income, even though Mr. Bailey never received them.
The Rest Of The Case Is A Mess
Mr. Bailey had two side businesses that lost money. One was remanufacturing planes and the other was yacht leasing. The IRS wanted to disallow both of them under Section 183 (hobby loss). The Tax Court gave him the remanufacturing, but agreed with the IRS that the yacht was mainly personal. In this and a host of smaller issues we see Mr. Bailey not appearing to grasp the fundamental difference between tax litigation and criminal litigation. The burden of proof is on the taxpayer to substantiate deductions not on the IRS to disallow them.
Mr. Bailey had two side businesses that lost money. One was remanufacturing planes and the other was yacht leasing. The IRS wanted to disallow both of them under Section 183 (hobby loss). The Tax Court gave him the remanufacturing, but agreed with the IRS that the yacht was mainly personal. In this and a host of smaller issues we see Mr. Bailey not appearing to grasp the fundamental difference between tax litigation and criminal litigation. The burden of proof is on the taxpayer to substantiate deductions not on the IRS to disallow them.
Mr. Bailey had kept records on his ventures in an airplane hangar that he had used in the airplane business. When he abandoned the business he gave up the hangar. He invited the IRS agent handling the case to come to the hangar to inspect and copy the records. The agent did go to the hangar. Mr. Bailey subsequently had the records destroyed and attributes much of his inability to document expenses to that sequence of events. The Tax Court isn’t buying that excuse noting that it is the taxpayer who has the obligation to maintain the records.
Mr. Bailey tried to call into question the motivation of the IRS agent who ran the audit. The Court overall gave the agent high marks:
The agent did a painstaking analysis of the data Mr. Bailey provided, correlated them to the tax returns as filed, and identified income items and deductions not reported on the returns. The audit adjustments reflected in the notice of deficiency (described below) are largely based on that analysis.
Adjustments proposed by the agent actually went both ways. Revenue agents are accountants not silver tongued orators or brilliant cross-examiners. Lots of ticking and tying and tracing. Those apparently are not Mr. Bailey’s strong suits.
The primary counter-evidence that Mr. Bailey produced at trial to support his position and contradict the agent on these miscellaneous adjustments was Quicken registers and cashflow reports for the 1993 through 2001 tax years. That is, he did not offer receipts or other transactional documents to substantiate the items on his return; he simply relied on his secondary Quicken records.
The primary counter-evidence that Mr. Bailey produced at trial to support his position and contradict the agent on these miscellaneous adjustments was Quicken registers and cashflow reports for the 1993 through 2001 tax years. That is, he did not offer receipts or other transactional documents to substantiate the items on his return; he simply relied on his secondary Quicken records.
For several of the years he lacked even those records; but on the eve of trial in 2009, Mr. Bailey was finally able to “unlock” password-protected copies of his Quicken data base from which he made printouts for all nine years. The data on the three available printouts made earlier (printed in October 1997 for tax year1996, in October 2000 for tax year 1999, and in October 2001 for tax year 2000) and the data on the 2009 printouts for those same three years are not identical and cannot be correlated with each other. ……..And in any event, the corrected data (if they are correct) on the later printouts (if they really are later) do not correspond to the tax returns. ………Rather than correlating the 2009 printouts with the returns, Mr. Bailey simply criticizes the Commissioner’s position for failing to take into account the 2009 printouts.
This part of the case reminds me a lot of Thomas Hale and Dean Pace, both attorneys who represented themselves in Tax Court. They both got creamed primarily because they could not do the ticking and tying and tracing that an accountant or a bookkeeper finds to be almost second nature. You don’t read about cases where the ticking and tying prevail, because they settle at the agent level or in appeals. The issue about income recognition on the stock belonged in Tax Court, but not most of the rest of this case. Mr. Bailey was up against four government attorneys on this case and he won on the complex legal issue. To the extent the government won the case, credit goes to the meticulous workpapers of Revenue Agents James Tabor and Bobby Kay Campbell. Agent Tabor stood cross examination from the great F. Lee Bailey. The pen is mightier than the sword and sometimes workpapers are mightier than an attorney’s eloquence. Accountants take heart.
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