Copyright (c) 2001 West Virginia Law Review West Virgina Law Review Fall, 2001 104 W. Va.

L. Rev. 1 LENGTH: 22111 words ARTICLE: THE CLINTONS' LEGAL DEFENSE FUND: INCOME FROM PAYMENT OF LEGAL EXPENSES BY ANOTHER AND DEDUCTIBILITY OF SUCH EXPENSES NAME: John R. Dorocak * BIO:
* Professor of Accounting, California State University, San Bernardino; Honors A.B., Xavier University; J.D., Case Western Reserve University; LL.M. (Tax), University of Florida; C.P.A. California and Ohio. The author thanks Marion Wiltjer whose invaluable and professional assistance was essential to the production of these pages and many others. Thank you also to my graduate assistant Pritpaul Singh, M.B.A., California State University, San Bernardino. And, of course, thank you to my wife Tanya, who constantly inspires me, to our cat Mitzi, who constantly diverts me, and to our son Jonathan, who constantly interests me. Additional thanks to participants at Western Region American Accounting Association Annual Meetings, particularly Richard Emery, Linfield College, and John Karayan, California State Polytechnic University, Pomona, and at Pacific Southwest Academy of Legal Studies in Business annual conferences, to all of whom I have been remiss in expressing gratitude formally in writing for their comments, suggestions, and questions.

LEXISNEXIS SUMMARY: ... The second trust they set up, the Clinton Legal Expense Trust, formed in 1998, raised $ 7.3 million and paid out all but $ 500,000 in legal expenses by February 2000. ... The Clintons' first legal defense trust fund, the Presidential Legal Expense Trust, was set up in June 1994 by the Clintons themselves. ... If the transfers to the Clintons' legal defense fund are income, then the next logical question becomes whether they can deduct payments made out of that income as a legal expense. ... The Clintons, however, could try to find substantial authority in two IRS pronouncements published in the Internal Revenue Bulletin, the Service's nonacquiescence in Carson and Revenue Ruling 72-355. ... However, the Clintons may have difficulty in finding "substantial" authority given that the authorities go both ways, as those authorities are defined by the IRS itself. ... The IRS anti-Carson position, plus some of the attorney's fees cases, might be enough to give the Clintons reasonable basis for their position of excluding the contributions to their legal defense trust. ... As previously mentioned, the Clintons' tax return apparently did not disclose the exclusion of the contributions to the legal defense trust. ... Furthermore, the Clintons may well be subject to a 20% substantial understatement penalty because their position may not have a substantial authority nor a reasonable basis plus disclosure. ... TEXT: [*2] I. INTRODUCTION Bill Clinton appears to be setting himself up for a tax problem. Some may ask, "How is he going to get out of this one?" n1 The President and Hillary [*3] Rodham Clinton set up not one but two trusts to pay their diverse and mounting legal expenses. The

second trust they set up, the Clinton Legal Expense Trust, formed in 1998, raised $ 7.3 million and paid out all but $ 500,000 in legal expenses by February 2000. n2 However, the Clintons' tax returns for 1998 and 1999 have not reported income from the legal defense trust when it paid their legal bills, nor deducted those legal expenses. n3 [*4] This Article will discuss the various legal issues raised by the Clintons' current situation with the second legal defense fund. The second part of the Article will discuss whether the Clintons have income from the payment of their legal expenses by the legal defense trust. The third part of the Article will discuss whether the Clintons, if they have includible income, can deduct the legal expenses paid by the trust. Then, the Article will turn to a discussion of whether the Clintons have an alternative minimum tax problem because the legal expenses are not deductible for AMT purposes. Finally, the Article will conclude with a discussion of whether a tax penalty should apply against the Clintons for substantial understatement and against their tax preparer for preparing the tax returns. II. INCOME FROM PAYMENT OF EXPENSES BY ANOTHER A. Introduction It has long been established, since the Supreme Court's opinion in Old Colony Trust Co. v. Commissioner, n4 that payments of the taxpayer's expenses by another are income to the taxpayer. n5 In a series of revenue rulings, the IRS has similarly ruled that payments of a public official's expenses are income. n6 In these rulings the IRS refused to accept the argument that these payments were merely gifts to the public official. n7 In doing so, the IRS necessarily dealt with whether the contributor had a sufficiently disinterested motive to support gift treatment under Commissioner v. Duberstein. n8 Therefore, the discussion of Old Colony Trust, Duberstein and subsequent cases are key to the following discussion of whether the legal defense funds are income. The Clintons' first legal defense trust fund, the Presidential Legal Expense Trust, was set up in June 1994 by the Clintons themselves. n9 However, [*5] this trust could not solicit contributions because of federal regulations restricting gifts to the executive branch, n10 did not accept donations of $ 1,000 per year for political reasons, n11 and "suffered from the taint of questionable foreign contributions before organizers voluntarily abandoned it." n12 This trust was terminated in December 1997. Shortly thereafter, in February 1998, the second legal defense trust fund, the Clinton Legal Expense Trust, was established. n13 The second trust, which was set up with former Arkansas Senator David Pryor as grantor, can solicit contributions and accept gifts up to $ 10,000 per donor per year, except from lobbyists, political action committees, and government employees. n14 The Office of Government Ethics, through its general counsel, has said that when a legal defense fund is set up by a third party, there are no limits on the size of contributions or how the money is solicited. n15 Therefore, because a third party set up the second legal defense fund, it avoided two of the three problems associated with the first trust and allowed the second trust to be much more successful in raising legal defense funds. n16 B. General Rules of Income Recognition 1. Old Colony Trust Co. and Pisani

As introduced above, it is well established that a taxpayer has income when another pays the taxpayer's expenses. n17 In Old Colony Trust Co. v. Commissioner, the United States Supreme Court held that officers of a corporation [*6] had additional income when the corporation paid, in addition to their salaries, the income taxes due on their salaries directly to the federal government. n18 The Court reasoned: The payment of tax by the employers was in consideration of services rendered by the employee and was a gain derived by the employee from his labor . . . . The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed. n19 The Court rejected the argument that the payments, approved by the Board of Directors above and beyond salaries, were gifts. n20 According to the Court, "The payment for services, even though entirely voluntary, was nevertheless compensation within the statute." n21 At first glance, this landmark decision appears quite applicable to Bill and Hillary Clinton. The two main issues from Old Colony Trust Co. that arise in later cases and rulings and also the Clintons' situation are: (1) whether the payments are for services; or (2) whether the payments are a gift. These two issues are, of course, often intertwined. The question of whether a donor to a political figure has made a gift is one of fact. In a relatively recent case, the Second Circuit, in United States v. Pisani, n22 attempted to explain the Old Colony Trust Co. rule and reconcile prior rulings of the IRS. n23 In Pisani, the only question before the court with relevance to this inquiry was whether the funds, which were contributed to the taxpayer's political campaign and diverted to personal use, were income per se or whether the determination of income was a question of fact. n24The court held the matter was a question of fact. n25 More specifically, the court quoted the twopart test of Revenue Procedure 68-19: n26 "If it can be shown that the funds were intended for the unrestricted personal use of the political candidate, then the service will apply the principles set forth in Commissioner v. [] Duberstein." [*7] n27 Therefore, to establish that a political contribution was a gift, the donee must meet a two-part test: (1) the donor must have intended the funds for unrestricted personal use by the donee political candidate; and (2) the donor must have had a "detached and disinterested generosity" motive per Commissioner v. Duberstein. n28 The trial court judge in Pisani apparently relied on Revenue Ruling 5480, n29 which held that political contributions diverted to personal use were taxable income as a matter of law. n30 The appellate court, however, followed Revenue Procedure 68-19, which modified the IRS's position and ruled that the matter was a question of fact. n31 The Pisani court also analyzed and distinguished Stratton v. Commissioner. n32 The Tax Court in Stratton held that "the line between an outright gift and a campaign contribution is a very thin line." n33 The court held that funds received by Stratton, a former governor of Illinois, were nontaxable gifts because of the unequivocal testimony of several individuals who said "they 'intended' to make outright gifts to Stratton to do with as he pleased with no strings attached." n34 This is, of course, the first part of the twopart Pisani test; the Stratton court also went on to apply what is essentially the second part of the Pisani analysis. The Stratton court held these transfers met Duberstein because they were made "from a 'detached and disinterested generosity; out of affection, respect, admiration, charity or like impulses.'" n35 2. Duberstein and IRS Rulings (on Transfers to Politicians) In Duberstein, the taxpayer provided sales leads to a business associate and received

a new Cadillac. n36 Both the taxpayer and the associate testified that the leads were the justification for the new car. n37 Justice Brennan set forth the test for a gift, i.e., the donor's "detached and disinterested generosity." n38 [*8] In a series of rulings the IRS has applied Duberstein to transfers to politicians to determine whether income was present. In Revenue Ruling 60-14, n39 the IRS ruled there was a lack of donative intent by the members of an organization who contributed funds to a committee to pay legal expenses of the taxpayer, an official of the organization. n40 The taxpayer was an elected official of the organization, which was apparently a labor or similar group, but not a government organization. n41 The Ruling was promulgated the same year as Duberstein but does not cite the case. The Ruling does, however, rely on similar reasoning by emphasizing the members' purpose of the payments and the "professed aim" of the fund-raising committee, which was "to aid the organization in general through defense of one of its officials." n42 Therefore, the payments by the committee were not gifts to the taxpayer, but rather constituted gross income to him. n43 In Revenue Ruling 73-356 n44 and two later discussed rulings, the IRS cited Duberstein and again found lack of donative intent. n45 In the Ruling, two congressmen accepted monies to defray costs of newsletters, the first by soliciting subscription fees solely to defray those costs and the second by soliciting contributions to a segregated bank account. n46 The IRS reasoned, "When a payment is made by a customer to a taxpayer who provides services to insure continuation of those services, that payment is not a gift." n47 Revenue Ruling 73-356 is important for two other decisions contained therein. First, the Ruling stated that performing the functions of a public office is a trade or business per Internal Revenue Coden48 $ S 7701(a)(26). n49 Second, the IRS stated that an elected official, such as a congressman, can deduct these expenses, but they are employee business expenses deducted "below the line," n50otherwise referred to as itemized deductions or expenses deducted "from [*9] AGI." n51 In Revenue Ruling 75-146, n52 the IRS ruled that funds solicited by a U.S. congressman for education and training of interns were not gifts, and therefore were income to the congressman. n53 The Service cited Duberstein and held that the donors did not have a "detached and disinterested generosity" motive, but rather sought a "more efficient public servant." n54 Finally, in Revenue Ruling 76-276, n55 the Service ruled that contributions of funds to a trust, which was set up to pay a congressman and his staff's travel expenses, were income and not gifts. n56Again the Service cited Duberstein and reasoned that donative intent was lacking because the contributors wanted to "enable the Member of Congress to become more accessible to constituents, which, in turn, provides constituents with the opportunity of obtaining more effective representation in Congress." n57 Also important in the Service's ruling was the statement that contributions to the trust affected the income of the Congressman because he could control the trust by controlling the travel. n58 C. The Clintons, Nixon, and the Teamsters 1. The Clintons Based on the above rulings and the Pisani case, it appears likely that the Clintons will have income from contributions to their legal defense trust. In all four rulings, the IRS

found a lack of donative intent, the "detached and disinterested generosity" required by Duberstein. n59 Additionally, the IRS found that the contributors made the contributions with another intent in mind. n60 For instance, in Revenue Ruling 60-14 n61 the IRS held that the donors wanted to aid their organization with the professed purpose of the fund-raising [*10] committee to counteract unfavorable publicity. n62 In Revenue Rulings 73-356, 75-146, and 76-276 the IRS found that contributors were seeking a more efficient public servant by contributing to or subscribing to a newsletter, n63contributing to a fund to educate and train congressional interns, n64 and contributing to a fund for travel expenses. n65 This discussion has focused mainly on the second part of the Pisani analysis, i.e., whether the contributions were gifts under Duberstein. If, however, taxpayers such as the Clintons do not first adduce evidence of donative intent for "unrestricted personal use," n66 then, presumably, the Duberstein analysis would never be needed. Yet, selfserving evidence of donor intent may be relatively easy to produce in order to meet the "unrestricted personal use" test. n67 In addition, the imposition of a trust between the donor and the beneficiary of the donations does not change the fact that there is income to the taxpayer according to Revenue Ruling 76-276. n68Rather, "the questions of control by, and inurement to the benefit of, the taxpayer, are of prime importance." n69 Furthermore, the IRS reasoned, "the taxpayer can control the distribution of trust funds by determining the extent to which the taxpayer or members of the taxpayer's staff will travel in connection with the discharge of the taxpayer's congressional duties and responsibilities." n70 The Clintons may argue that their trustee, rather than themselves, controlled distribution of the funds. However, under the reasoning of Revenue Ruling 76276, the Clintons controlled the distribution of the funds by determining the extent to which they would be more or less likely to incur attorney's fees. n71 [*11] In fact, in Pisani, the court, quoting Rev. Proc. 68-19, n72 stated: The service will presume in the absence of evidence to the contrary that contributions to a political candidate are political funds, which are not intended for unrestricted personal use of such recipient. If it can be shown that the funds were intended for the unrestricted personal use of the political candidate, then the Service will apply the principles set forth in Commissioner v. []Duberstein . . . . n73 One might ask what the Clintons' position could be other than the seemingly glib answer that contributions to the legal trust are gifts. However, their position clearly appears to be that the contributions are gifts. The law firm Sullivan & Cromwell, which drafted the first trust, took the position that the transfers were not made to help a public official carry out official duties because the legal problems arose before the President took office. n74 This argument is apparently attempting to avoid the Revenue Rulings, which indicate that contributions which aid in carrying out official duties lack donative intent. Also, lawyers for the second trust appear to have decided that the transfers are to be treated as gifts to the Clintons rather than income. n75 This line of reasoning leads to an obvious query: Is helping Bill and Hillary Clinton with attorneys' fees related to their official duties because it enables them to function and restore their reputations? n76 2. Teamsters (O'Malley)

It is hard to resist arguing that the Clintons are in a worse position than Thomas O'Malley, a Teamsters pension fund trustee indicted for taking part in a conspiracy to bribe a United States Senator.n77 In O'Malley v. Commissioner, n78 the Tax Court held that (1) O'Malley had income when the pension fund paid his legal fees in the unsuccessful defense of the criminal prosecution for conspiracy [*12] to commit bribery, n79 and (2) O'Malley could deduct the legal fees, paid by the pension fund on his behalf as ordinary and necessary business expenses of an employee. n80 O'Malley argued that no income should be attributed to him because the legal expenses were really those of the pension fund. n81 However, the court disagreed and held that the legal expenses were personal to O'Malley because the pension fund was not a defendant and it was not shown that the pension fund knew or directed O'Malley's criminal activity. n82 In fact, the court held that, even if the pension fund knew or directed the activity, it was not a party to the criminal prosecution. n83 Most of the contributors to the Clintons' fund, it is hoped, are neither parties to their legal proceedings nor directed or knew of the activities which are the subject of those law suits. n84 The O'Malley case is important for an analysis of the Clintons' tax situation for two other reasons: employee business expenses and the alternative minimum tax, both of which will be discussed below.n85 The court held that there was "a significant connection between the activities for which Mr. O'Malley was indicted and his employment" and reasoned that "a taxpayer may be in the trade or business of being an employee and, as such, may deduct business expenses which no employer directs him to incur." n86 The court also added that "deregulation threatened to affect the profitability of Mr. O'Malley's employer, and hence, threatened the security of his employment position." n87 Consequently, the court held that the legal expenses were deductible as employee business expenses because they were associated closely enough with the taxpayer's business of being an employee. n88 Although the court held the deduction was an itemized deduction, there was not an alternative minimum tax problem under the old alternative minimum tax for the 1981 and 1982 income tax years. n89 Under the current alternative minimum tax, however, the Clintons [*13] likely face an AMT problem. n90 3. Nixon (Carson) Rather than relying on a case involving the Teamsters, the Clintons are probably relying on an IRS position refuted in an earlier Tax Court case, Carson v. Commissioner. n91 Carson tangentially involved another president who, on a side note, was tied to the Teamsters politically: Richard Nixon. n92 As mentioned, one might regard the Clinton attorneys' and trustees' assertions that the contributions to the legal defense fund were gifts rather glib until examining this case, which was apparently used as a stalking horse for cases involving contributors, among others, to the Committee to Re-elect the President (CREEP), which was President Nixon's fund raising committee. n93 In Carson, the taxpayers contributed to, or expended funds for, campaign committees for a number of candidates in and around Kansas City, Kansas, and the IRS asserted a gift tax deficiency against the taxpayers. n94 The taxpayer husband was both an investor in oil and gas producing properties and an attorney in a law firm with prominent governmental clients. n95 The court stated, "These facts do not suggest a gift to the candidate, but the use of petitioner's resources to promote the social framework petitioner considered most auspicious to the attainment of his objectives in

life."

n96

Thus, the court concluded that petitioner/taxpayer David Carson did not make taxable gifts because he did not have a disinterested motive. In its analysis, the court considered the issue as a question of fact, although the court did not cite Duberstein or Pisani or the IRS rulings discussed above. n97 The court supported its conclusion by reasoning that "this review of the legislative history of the gift tax clearly demonstrates that it was intended to backstop the estate [*14] tax." n98 The court's reading of legislative history may be strained. Judge Tannenwald, concurring, joined by Raum and Sterrett, would have held there was no gift "absent a familial or other personal relationship between a candidate and his benefactor." n99 Judge Hall, concurring, joined by Drennan and Goffe, thought an expenditure for "propagation of views of political policy" was "no more a gift to the recipient than is an expenditure for a newspaper advertisement a gift to the paper." n100 The dissenters, Judges Simpson, Chabot, and Quealy, would have held that the transfers benefiting the social framework could be gifts. n101 The court also noted that, with regard to transfers after May 7, 1974, the gift tax was made inapplicable to transfers to political organizations by I.R.C. $ S 2501(a)(5). n102 The Carson case remains relevant, however, because the transfers to the Clintons' legal trust are not to a political organization but to individuals. Additionally, although the Tenth Circuit affirmed the Tax Court in Carson, the IRS did not acquiesce in the Carson cases. n103 As mentioned above, the Carson case involved contributions to less prominent politicians and, therefore, may have been used as a stalking horse for contributions to other politicians. n104 [*15] Thus, the Clintons are apparently relying on an IRS position used against taxpayers and rejected by the Tax Court. This presents an interesting question of whether the IRS will seek to audit the Clintons' tax returns when the Service's own position is that there was no income, only potential gift tax. D. A Crummey Problem (Crummey and Cristofani) Even if the Clintons prevail in their argument discussed above, and the transfers to their legal defense trust are gifts, the gifts would still need to be gifts of a present interest for the transferors to claim the gift tax exclusion of $ 10,000 per donee per year under I.R.C. $ S 2503(b). n105 According to Crummey v. Commissioner n106 and its progeny, the beneficiary of a gift to a trust receives a present interest, which qualifies for the $ 10,000 annual exclusion, if the beneficiary has a legally unrestricted present right to demand that the trustee distribute the property to him. n107 In Estate of Cristofani v. Commissioner, n108 one of Crummey's progeny, the Tax Court held that five minor contingent remainder beneficiaries received a present interest when they had a right to withdraw funds for a limited time of fifteen days. n109 Under the Clintons' second legal defense fund, there is apparently a power to withdraw funds that lapses within thirty days of contribution. This lapsing power would seem to satisfy Crummey and Cristofani. However, the Clintons have apparently provided a letter to the trustees saying they will not exercise their power to withdraw funds. n110 It is not clear whether this letter, an advance notice to the Trustees, could deny present interest treatment to the transfers. In Estate of Holland v. Commissioner, n111 a failure to notify minor beneficiaries constituted merely a factor in the likelihood of withdrawal, [*16] rather than denial of the right to withdraw. n112 The court then held there was a present

interest. n113 In dicta, however, the court agreed with the IRS that a tacit understanding in advance not to exercise withdrawal rights might negate a present interest, but found the facts were otherwise. n114 The fact that the Clintons may have agreed in advance in writing not to withdraw funds raises the question of whether they received a present interest for gift tax purposes. However, at least one commentator has argued that, when the trust pays the legal bills, there is a constructive distribution to the Clintons, thereby negating their express agreement not to withdraw. n115 E. Unfairness (Paula Jones) One unanswered question from this section is whether the Clintons' tax returns, which do not report the contributions to the legal defense funds as income, will ever be audited by the IRS in light of its position in Carson that the contributions are gifts. Paula Jones, Bill Clinton's nemesis in the sexual harassment lawsuit, also established a legal fund. n116 Her tax return, however, was selected for examination, possibly, according to one commentator, because of her legal fund and the issues associated with it. n117 As that commentator points out, if the IRS does not audit the Clintons' returns, an issue of fairness may arise. n118 III. DEDUCTION OF LEGAL EXPENSES A. Introduction: The General Rules - Gilmore and More (Jenkins and Salt) If the transfers to the Clintons' legal defense fund are income, then the next logical question becomes whether they can deduct payments made out of that income as a legal expense. In the area of deductions, the Clintons' potential tax problems seem to involve a number of leading cases, possibly indicating that the nature of these issues go to the fundamentals of tax law. Legal expenses are deductible only if they arise out of a trade or business or an income-producing [*17] activity. n119 The determination of whether a claim arises out of a trade or business, deductible under I.R.C. $ S 162, or an incomeproducing activity, deductible under I.R.C. $ S 212, depends on several factors. n120 Interpreting these provisions, the U.S. Supreme Court, in a landmark case, United States v. Gilmore, n121 set forth the basic test for deductibility of legal expenses: the origin of the claim test. n122The Court stated that "the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether the expense was 'business' or 'personal' and hence whether it is deductible or not." n123 One court has suggested that these factors include "the issues involved, the nature and objectives of the litigation, the defenses asserted, the purpose for which the claimed deductions were expended, the background of the litigation, and all facts pertaining to the controversy." n124Therefore, in determining whether legal expenses are deductible, the issue of whether the expenses are business related or personal depend on how connected the legal expenses are to trade or business or incomeproducing activity. n125 Two key cases show how courts have extended the concept of connectedness. In Jenkins v. Commissioner, n126 the Tax Court allowed country western music singer, Conway Twitty, n127 to deduct payments n128 that he made on behalf of his Twitty Burger Restaurants purportedly to protect his music business reputation. n129 The Jenkins court held that "Conway Twitty repaid the investors in Twitty Burger with the primary

motive of protecting his personal business reputation" n130 and concluded that "there was a proximate relationship between the payments made to the holders of Twitty Burger debentures and the petitioner's [*18] trade or business as a country music entertainer so as to render those payments an ordinary and necessary expense of the business." n131 In Jenkins, there was testimony from a country music expert and the petitioner himself that, in the words of the expert, "a country entertainer's character, personality, and credit reputation are part and parcel of his role as a singer." n132 (Or, to suggest a possible lyric to be sung with a deep resonating male voice -ala, say, Waylon Jennings: In country music, your reputation is everything.) Apparently, the testimony was persuasive because the court concluded poetically, Had Conway not repaid the investors His career would have been under a cloud, Under the unique facts of this case Held: The deductions are allowed.
n133

Also, in Salt v. Commissioner, n134 the Tax Court allowed a movie script writer to deduct his legal expenses incurred in appearing before the House Committee on UnAmerican Activities, which was investigating charges of Communist infiltration in the motion picture industry. n135 The Salt court explained, in language that also might be helpful to the Clintons: Applying here the reasoning and expression used in the Heininger case, supra, 'Upon being served' with a subpoena to appear before the Committee, petitioner 'was confronted with a new business problem which involved' his present and future business welfare. Ordinary business prudence demanded that petitioner employ counsel to advise with and represent him in such an emergency. n136 B. Politicians, Sexual Harassment, and the Gilmore Test for Deducting Legal Expenses 1. Politicians and Professionals: McDonald, Lussy, Messina, McDonald, & Soloman There are cases involving situations more specific to politicians and [*19] sexual harassment defendants deducting legal expenses than Jenkins and Salt that may be even more apropos to the Clintons. n137 In McDonald v. Commissioner, n1388 for instance, the Supreme Court ruled that a judge seeking office could not deduct campaign expenses as expenditures in his trade or business. n139Yet, in Commissioner v. Heininger, n140 the Supreme Court held that a dentist, who sold dentures by mail and had been charged by the Postmaster General with a fraud order for false claims about his wares, could deduct legal expenses for the unsuccessful fight against the fraud order. n141 Similarly, in Revenue Ruling 71-470, n142 a public official was permitted to deduct the cost of defending himself against a voter recall. n143 The IRS reasoned in the Ruling that the taxpayer was merely defending his current position rather than campaigning for a new term of office. n144 The Service distinguished campaign expenditures, which are not deductible under McDonald v. Commissioner, from the expenses of defending one's business, which are deductible under Commission v. Heininger. n145

In Revenue Ruling 74-394 n146 the Service also ruled that a judge could deduct the costs of defending himself against charges of misconduct while in office. n147 The IRS cited another leading case, Commissioner v. Tellier, n148 for the [*20] proposition that legal expenses in the defense of a business-related criminal prosecution, as distinguished from the Postmaster General's fraud order, were deductible as ordinary and necessary business expenses. n149 In Tellier, the taxpayer mounted an unsuccessful defense to a criminal prosecution for violations of the fraud section of the Securities Acts of 1933 and the mail fraud statute. n150 In the Ruling, the IRS also distinguished McDonald as involving expenditures "in seeking election" but "not incurred in carrying on his business of 'judging.'"n151 The opposite of an expenditure connected with a trade or business is one which is personal. Personal expenditures are not deductible under I.R.C. $ S 262. n152 Often, the cases on deductibility of legal expenses turn on whether they are connected, on the one hand, to a trade or business or, on the other hand, to personal activities. A number of cases have denied deductions of legal expenses where the expenses, according to the courts, were from personal activities. And, somewhat similar to issues that could arise in a Clinton case, these cases even include "sexual perversion" and political candidates, government employees, attorneys, and other professionals. In Lussy v. Commissioner, n153 for example, an unsuccessful candidate for local property tax appraiser sued a police officer who noted on a traffic ticket that the taxpayer said he was in an undesirable area looking for a woman. n154 Taxpayer Lussy later attempted to deduct the legal fees of his suit for defamation, invasion of privacy, and intentional infliction of emotional distress. n155 The Tax Court held that "the origin of the claim was a personal matter and not connected with petitioner's real estate appraisal business."n156 Similarly, in Messina v. United States, n157 the taxpayerplaintiff, an employee of the California Department of Human Resources, tried to deduct legal expenses of defending against an unsuccessful prosecution for sexual perversion. n158 The Court of Claims explained the Gilmore test: "The test might be [*21] more simply viewed as looking to the origin of the operative facts leading to the litigation rather than the effects of the litigation on the taxpayer." n159 Then the court denied the deduction, holding that "the legal fees were spent to defend a criminal charge that arose out of personal conduct." n160 Although some may claim that Bill Clinton may have been looking for a woman as was taxpayer Lussy, n161 or involved in a situation somewhat similar to Messina, n162 Bill Clinton's legal problems are easily distinguishable from the situations Lussy and Messina were involved in. Many of his legal expenses were incurred in a civil suit for sexual harassment brought by Paula Jones n163 and for lying under oath, both to the district court hearing the Jones case in Arkansas and to the grand jury in Washington D.C., when he was questioned by the independent counsel regarding the Jones case and his testimony, particularly as it related to White House intern Monica Lewinsky. n164 Thus, applying the Gilmore [*22] test, "The origins of the operative facts leading to the litigation" for Bill Clinton were in employment situations. Paula Jones was an Arkansas state employee when Clinton was employed as governor n165 and Monica Lewinsky was a White House intern n166 when Clinton was employed as President. Additionally, it should be noted that Hillary Clinton, however, may have to strain a bit more to connect her legal expenses to employment. She was employed by the Rose Law Firm but not, presumably, by the White House. n167

Yet, professionals are not immune to legal expenses being classified as personal. For example, in a different McDonald v. Commissioner, n168 this one a Second Circuit case, the court denied an attorney's deduction for a settlement [*23] paid to avert a threatened lawsuit contesting the will in which several bequests were made to that attorney. n169 Similarly, in Solomon v. Commissioner,n170 not Dr. Soliman's case involving his home office, n171 the Supreme Court denied an accountant's deduction of expenses to settle a lawsuit for alleged misappropriation of funds of his father's, over which the taxpayer argued he was a trustee. n172 Yet, Bill Clinton's legal expenses with regard to Paula Jones and Monica Lewinsky do not appear to involve the type of familial situation involved in McDonald and Soloman, and therefore, would not pose a problem to deductibility. 2. Sexual Harassment and the "Furtherance" Test Some might argue that Bill Clinton's sexual harassment of Paula Jones while he was governor or lying under oath regarding Monica Lewinsky while he was president did not "further" his business as an employee government official. n173 The Tax Court adopted this furtherance of the business test in a 1988 memorandum opinion, Oden v. Commissioner, n174 in which the court denied deductibility of legal costs incurred defending against a defamation suit. n175 In Oden, the jury found that a sole proprietor florist maliciously defamed a former employee when two prospective employers requested references. n176 Because the jury found that the defamatory statements were made with malice, the Tax Court held that the legal expenses were not deductible because they did not further the florist's business. n177 The court distinguished Tellier, where a deduction was allowed for legal expenses in a criminal prosecution for violations of fraud under the Securities Act of 1933, because there the fraud furthered the securities business. n178 Earlier, in 1934, the Ninth Circuit, in Pantages Theatre Co. v. Welch, n179 held that a corporation could not deduct legal expenses incurred while defending its president against a criminal charge of raping a prospective employee during a [*24] job interview because the legal expenses were not ordinary and necessary as they did not further the corporation's business. n180 Pantages, however, is somewhat distinguishable, both legally and factually, from Bill Clinton's situation because (1) it predates and conflicts with the leading cases of Gilmore and Tellier; (2) the rape originated from a job interview; (3) there was no liability for the corporation paying the expenses, although there is such liability in sexual harassment; and (4) the Pantages president did not pay his own legal expenses.n181 Furthermore, the Tax Court itself, in a 1980 regular opinion, (pre-Oden) appears to have rejected, or at least limited, the furtherance test in Dancer v. Commissioner, n182 a case in which a taxpayer horse trainer was sued after he hit and injured a child while driving his car from a farm, where he trained horses, to his home office. n183 The court held that the legal settlement costs were deductible and reasoned that the car trip was integral to the business and, even if it did not further the business, the payment was insignificant. n184 However, Dancer is distinguishable from Oden on at least two grounds: the significance of the payment and the fact that the activity (driving versus raping) was a part of the business. Although the Service appears to have at one point taken an audit position that legal expenses of defending against sexual harassment are not deductible because the sexual conduct does not further the business, other courts still have not adopted this reasoning, and the Tax Court itself has ignored it at times. n185 In Clark v.

Commissioner, n186 for example, also an older (1958) regular Tax Court opinion, a magazine subscription company manager paid legal fees in defense of both criminal and civil suits involving an alleged sexual attack on a female applicant during a job interview. n187 The Court held that the taxpayermanager was allowed to deduct his legal expenses of defending against the later dismissed criminal charge and his settlement costs in a civil suit. n188 Also, in 1979, the year before Dancer, a General Counsel's Memorandum n189 stated as follows: [*25] Moreover, even though the particular acts bringing about the criminal charges were beyond the scope of the taxpayer's duties of employment and were performed for his personal profit to the detriment of the interest of his employer and his position of employment, nevertheless, such charges and the consequent legal costs may find their source in the taxpayer's profit-seeking activities or the character of the conduct from which such charges arise may be of a "business" nature. If either the source of the charges is in his profit-seeking activities or the character of the charges is of a business nature, the ensuing defense costs will be deductible. n190 Two commentators, writing together, have indicated that determining whether legal expenses regarding sexual harassment are deductible depend on the nature of the claim, which taken altogether form a continuum of types of sexual harassment. n191 Claims may arise (1) at the workplace, (2) on business trips, or at business meetings or at a client's or customer's work location, (3) with the employercorporation as defendant, (4) or after work (a romantic relationship) with retaliation at work, or finally, (5) in some way unrelated to the taxpayer's business. n192 Along these lines, in Finger v. United States, n193 a district court denied the deduction of legal expenses to a doctor-taxpayer incurred in defending against a lawsuit brought by his nurse's husband for loss of consortium and medical expenses. n194 The husband claimed the taxpayer addicted his wife to narcotics, had sexual relations with her, and performed an abortion on her. n195 The court held the lawsuit arose out of the taxpayer's personal relations and, therefore, the legal expenses of the lawsuit were not deductible. n196 However, at least one commentary has suggested that the taxpayer in Finger could have deducted the legal expenses if the wife-nurse had brought a lawsuit because her claim was related to the doctor's business, or arose in it, although the husband's claim was not so business related but rather "personal." n197 Under the commentary's [*26] intricate interpretation of Finger, Bill Clinton's defense expenses regarding the Jones litigation and subsequent grand jury investigation would still be deductible as related to his business of, at least, being governor, or possibly, being President, as discussed immediately below. C. Gilmore, the Clintons, and Deducting Legal Expenses Bill Clinton's legal expenses, arising from testifying to the grand jury when questioned by the independent counsel and from lying in a deposition in the Jones case while President, seem clearly connected to, or arising in, his trade or business of being employed as President under the Gilmore test of origin of the claim. Furthermore, Bill Clinton's legal expenses in defending against the sexual harassment lawsuit brought by Paula Jones also are related to a claim with its origin in his trade or business, this time because he was governor of Arkansas at the time of the alleged harassment. Or, as one commentator has suggested, the cost of protecting his reputation while President, by defending against the Jones' lawsuit, may be deductible under Gilmore

as connected to the trade or business of being President because protection of reputation is necessary to carry on that trade or business. n198 There is some authority, such as the Jenkins case discussed previously, n199 to support the proposition that legal expenses to defend one's reputation are deductible, where reputation is closely related to the taxpayer's employment. n200 It would be logical to conclude that it is very important for a president to maintain his or her reputation. The fact that Bill Clinton's behavior was not in furtherance of his employers' interests does not appear relevant to deductibility under Gilmore, Dancer, Clark, and G.C.M. 38,112, despite Oden and Pantages Theatre. However, if Bill Clinton's behavior had to be in furtherance of his employers' interests, [*27] per Oden and Pantages Theater, his potential deduction of legal expenses would seem thwarted. Perhaps one way to distinguish Oden and Pantages from the other authority is that they involve wrongs or crimes, specifically malicious defamation and rape, which are clearly not part of doing business. n201 Even this attempted distinction may fail in light of Gilmore's origin of the claim language and similar language in G.C.M. 38,112. n202 Consequently, Bill Clinton will probably be able to deduct the legal expenses if they are income. Finally, if any of Hillary Clinton's legal expenses have been paid by the trusts, n203 she would similarly have to link the origin of her expenses to employment of hers. The position of first lady, however, does not appear to be one of an employee or a trade or business, and therefore might have a more difficult time in deducting her legal expenses paid by the trusts. IV. ALTERNATIVE MINIMUM TAX AND THE EXCLUSION FROM INCOME OF DEFENDANT'S ATTORNEY'S FEES IN TRUST A. The AMT Problem: Attorney's Fees as Non-Deductible Miscellaneous Itemized Deductions At this point, it should seem clear that the Clintons have income under the longstanding rules, such as Old Colony Trust, for the payments of their legal expenses by their second legal defense trust and can likely take an offsetting deduction of those legal expenses paid. Legal expenses of an employee are deducted as itemized deductions, below the line, under miscellaneous itemized deductions subject to the 2% of AGI floor. n204 Employee business expenses, however, are not deductible for the AMT and thus are added back to taxable income to reach alternative minimum taxable income.n205 An AMT problem arises with the deduction of legal expenses, but also may present a solution. Recently, some commentators have argued that winning plaintiffs in a lawsuit could avoid the add back of deductible employee legal expenses, and, consequently, avoid the AMT problem, by arguing that such plaintiff-taxpayers never received income when their attorney's fees were a contingent percentage of their [*28] lawsuit proceeds. n206 The Clintons, if they indeed have income from payment of the legal expenses by the trust and a deduction for those expenses, will fall precisely within the AMT disallowance of employee business expenses. However, the Clintons, as defendants, might try an argument that they had no control over the funds of the trust to extent the funds paid attorneys' fees. This argument has had some success, as discussed below, when winning plaintiffs have argued that they have no control over awards to the extent the awards pay attorneys' fees. B. Cases Excluding Plaintiff's Attorney's Fees - Cotnam, Clarks, Baylin, Coady, and

Kenseth For years taxpayers have faced the problem of income from lawsuit awards and settlements, without always receiving a corresponding deduction for legal expenses. As mentioned above, legal expenses, which are miscellaneous itemized deductions as employee business expenses, are not deductible for the AMT. n207 Plaintiff-taxpayers have attempted a variety of creative methods to obtain the deduction or to exclude the portion of an award or settlement paid out as their attorneys' fees. n208 Although the Clintons are, as defendants, distinguishable from the plaintiffs who have succeeded in these attempts, some of the theories used to exclude plaintiffs' legal fees may be used to exclude or deduct their legal fees as defendants. 1. Cotnam In the leading case for plaintiffs excluding legal fees from an award, Cotnam v. Commissioner, n209 a purported legatee of an estate sued for a one-fifth share. n210 A three-judge panel of the Fifth Circuit agreed that the award was for past services rendered because the deceased had promised the plaintiff Cotnam a [*29] one-fifth share of his estate if she cared for him for the rest of his life.n211 However, the judges disagreed as to whether plaintiff Cotnam could include as income her litigation award net of attorney's fees. n212 Judge Wisdom dissented believing that Helvering v. Horst,n213 on assignment of income, and Old Colony Trust, on payment of one's expenses by another, controlled and required income recognition. n214 The majority, in effect, excluded the attorney's fees from Cotnam's award by allowing her to include only the net amount on the theories that (1) plaintiff Cotnam had nothing to assign as income because her claim was "worthless without the aid of skillful attorneys" n215 and (2) her obligation to make payments of attorneys fees was only contingent and therefore outside Old Colony Trust Co. n216 Although Judge Wisdom dissented from the conclusion regarding the attorney's fees, he wrote for the majority on whether the award was a bequest or payment for past services. n217 In doing so, Judge Wisdom sought to categorize the majority's holding on the exclusion of the attorney's fees from income as dependent upon the Alabama Attorney Lien Statute. n218 2. Clarks The Sixth Circuit has adopted the Cotnam result, but the Federal Circuit, Ninth Circuit, Third Circuit, and Tax Court have rejected Cotnam. n219 In Estate of Arthur Clarks v. United States n220 the Sixth Circuit allowed a plaintiff to exclude part of an award paid to his attorneys. n221 A jury had awarded the plaintiff $ 5.6 million against K-Mart for head injuries, as well as another $ 5.7 million in post-judgment interest. n222 The $ 5.6 million was excluded as personal injury damages under Internal Revenue Code $ S 104(a)(2) but the $ 5.7 million was includible. [*30] n223 The court held that the plaintiff could exclude the $ 1.9 million of contingent attorney's fees on the $ 5.7 million interest by following Cotnam and reasoning that the Michigan Attorney Lien Statute was similar to that of Alabama's. n224 3. Baylin In Baylin v. United States, n225 the Federal Circuit rejected Cotnam and reasoned that an attorney lien statute does not override assignment of income cases. n226 In Baylin, a plaintiff partnership sought a higher evaluation for property seized by the state of Maryland. n227 The court held that no part of the attorney's fee was allocated to and excluded from an interest recovery but all of the fee was a non-deductible capital expenditure. n228 The Baylin court thereby forced a capital, rather than an ordinary,

treatment of the fees which offset gain on the state's condemnation award. 4. Coady

n229

In Coady v. Commissioner, n230 the Ninth Circuit rejected Cotnam and Estate of Clarks and adopted Baylin. n231 The court reasoned that (1) "attorneys do not have a superior lien or ownership interest" in Alaska, n232 (2) the defendant paid the full amount to the plaintiff and the plaintiff then paid the attorney's fees, n233 and (3) the assignment of income doctrine applies. n234 At least one commentator has said that these cases use a "three-pronged analysis" of "attorney lien statutes, the assignment-of-income doctrine, and Old Colony Trust analysis." n235 [*31] 5. Kenseth In Kenseth v. Commissioner, n236 the Tax Court also held that attorney's fees were not excludable from an award. n237 Kenseth was a member of a class action lawsuit under the Federal Age Discrimination in Employment Act. n238 Under the contingent fee contract, 40% was due the attorneys (46% in the case of an appeal), and Kenseth's award was paid into an attorneys' trust account with Kenseth receiving only the amount net of attorney's fees. n239 In a reviewed opinion, the Tax Court split, with eight judges in the majority opinion and five dissenting. n240 The majority used the assignment of income doctrine and declined to use the attorney lien statute argument in holding inclusion of the full award, including fees, was required. n241 Judge Chabot, in one dissent, rejected the application of the assignment of income cases because of "hardship" and was unwilling to await a change in the alternative minimum tax rules by Congress as was the majority. n242 Judge Beghe, the presiding judge at trial, also rejected the assignment of income cases, but specifically because "Kenseth did not retain enough control over his claim." n243 6. The Clintons and Excluding Defendant's Attorney's Fees As discussed above, the Clintons fall squarely into an AMT problem if they have income from the trust payments of legal expenses and select to deduct those expenses as employee business expenses.n244 Could the Clintons argue Cotnam for themselves as defendants with legal fees, saying that they never had income from a trust, whose proceeds were used to pay their attorneys' fees, because they never had any control over income? This argument was discussed above in the context of Revenue Ruling 76-276 and a potential argument by Bill Clinton that he had no control over trust funds.n245 Still, the Clintons could argue they suffer the same inequity that Judge Chabot was concerned about in his Kenseth dissent. n246 That is, if the Clintons have income, they will run into the [*32] AMT problem that Judge Chabot was willing to repair without congressional intervention. n247 However, such arguments most certainly fly in the face of Old Colony Trust Co. However, Old Colony Trust Co. may be distinguished as standing for a third party paying one's expenses, where that third party would otherwise be paying salary or dividends to an individual. Still, such reasoning would bring one back to the question of the motives of the third parties, which was discussed earlier. Do the third parties have the requisite donative intent or disinterested motive of Duberstein? Given this reasoning, the hot issue raised in such recent cases as Estate of Clarks, Kenseth, and Coady seems to require revisiting the venerable cases of Old Colony Trust Co. and Duberstein, as well as Helvering v. Horst. Unless of course, one is as prepared as Judge Chabot in Kenseth to reject the application of established judicial doctrines. n248 Judge Chabot specifically rejected the assignment of income

doctrine. n249 The Clintons, therefore, in all likelihood, would have to hope for a rejection of Old Colony Trust Co. and Duberstein to avoid an AMT problem. V. THE CLINTONS' LEGAL EXPENSES AND TAXPAYER PENALTIES, PREPARER PENALTIES, AND PREPARER ETHICS The final issue which arises for the Clintons and which this Article will address is whether the Clintons and their tax preparer are subject to any penalties or preparer ethics provisions for their current or possible future return filing positions. n250 The Clintons' tax returns for 1998 and 1999 did not include any income for contributions to their legal defense trusts nor, apparently, any disclosures relating to the failure to include income. n251 Similarly, if the Clintons were to include income for contributions to the trust and then deduct the legal expenses, a second issue that arises is whether or not they and their preparer would be subject to any penalties or ethical provisions. [*33] A. Taxpayer and Preparer Penalties I.R.C. $ S 6662 imposes a 20% penalty on a taxpayer who substantially understates the tax liability due on a tax return. n252 The 20% penalty is applied only to the amount of the understatement.n253 A taxpayer may avoid the substantial understatement penalty, however, if there is (1) substantial authority for the taxpayer's filing position or (2) disclosure by the taxpayer and a reasonable basis for the taxpayer's filing position. n254 "Substantial authority" is a less stringent standard than "the more likely than not" standard n255 but more stringent than the reasonable basis standard. n256The Treasury Regulations provide that "there is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment." n257 For purposes of determining substantial authority only certain authority may be relied upon. n258 Such qualified authority includes the I.R.C., statutes, regulations, revenue rulings, revenue procedures, and court cases. n259 [*34] If the taxpayer cannot meet the substantial authority standard, then the penalty may still be avoided if there is a reasonable basis and disclosure. n260 However, "reasonable basis" is considered to be a "'significantly higher' standard than 'not frivolous.'" n261 Recently, reasonable basis has been defined as an even higher standard than before. In new Regulations $ S $ S 1.6662-7(d) and 1.6662-3(b)(3), reasonable basis is defined as reasonable reliance on one or more of the authorities permitted to be used to establish substantial authority. n262 I.R.C. $ S 6662 also imposes a 20% penalty on a taxpayer for underpayment of taxes if the underpayment is due to the taxpayer's disregard of rules or regulations. n263 For a taxpayer to avoid this 20% penalty for disregard of rules and regulations, similar disclosure and reasonable basis for a filing position are both required. n264 A taxpayer may avoid all of the 20% penalties imposed under $ S 6662, including the negligence penalty, by showing reasonable cause and good [*35] faith. n265 "The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances." n266 According to the Regulations, the most important factor generally is the extent of the taxpayer's effort to assess his or her proper tax liability. n267 Tax return preparers are also subject to penalties for an understatement of a taxpayer's liability. n268 I.R.C. $ S 6694(a) imposes a $ 250 penalty on a preparer who

understates a taxpayer's tax liability based on an unrealistic position. n269 I.R.C. $ S 6694(b) also imposes a $ 1000 penalty on a preparer who understates a taxpayer's tax liability willfully or in reckless or intentional disregard of rules and regulations. n270 "Rules and Regulations," according to the Service, include treasury regulations, revenue rulings, and IRS notices. n271 For a preparer to avoid the $ 250 unrealistic position penalty, either (1) a realistic possibility of prevailing on the merits (a realistic possibility of success or RPOS), or (2) a non-frivolous position and disclosure is required. n272 RPOS is a one-third or greater likelihood of being sustained on the merits. n273 A frivolous [*36] position, on the other hand, is one which is patently improper. n274 The standard for practitioners to avoid the $ 1000 $ S 6694(b) penalty, for willful understatement or reckless disregard of rules or regulations, does not seem to be very different from the $ S 6694(a) standard of RPOS or a nonfrivolous position and disclosure. The Service has stated that a preparer who takes a position contrary to a revenue ruling or notice is considered to have acted recklessly or intentionally if the position does not have RPOS, n275 unless the position is non-frivolous with adequate disclosure and good faith. n276 However, disclosure differs for reckless conduct and an unrealistic position: without a Form 8275 or 8275R, disclosure on the return does not prevent the reckless conduct penalty for a non-frivolous position even where there is good faith. n277 Concerning RPOS, the regulations indicate that several court cases holding that a revenue ruling is incorrect meets the reasonable possibility standard, but merely one Tax Court case invalidating a regulation does not. n278 As with the taxpayer penalties, the tax return preparer penalties of $ S 6694 may not be imposed if the preparer's understatement is due to reasonable cause and the preparer acted in good faith considering all the circumstances involved. n279 However, this reasonable cause and good faith exception "does not apply to an error that would have been apparent from a general review" of the return by the taxpayer. n280 B. Application of Penalty Rules to the Clintons and Their Tax Return Preparer The Clintons' 1998 and 1999 tax returns, as filed, excluded the contributions [*37] to their legal defense trust. n281 Those tax returns also apparently do not make a disclosure concerning the exclusion. n282 Therefore, for the Clintons to avoid the $ S 6662(d) penalty for substantial understatement, they will need substantial authority. The IRS has defined substantial authority as including, among other things, court cases and "notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin." n283 The most directly applicable court case regarding the Clintons' likely argument that the contributions to their trust were gifts, Carson v. Commissioner, ruled against the IRS when it made the argument that similar transfers to individual politicians were gifts. n284 The Clintons, however, could try to find substantial authority in two IRS pronouncements published in the Internal Revenue Bulletin, the Service's nonacquiescence in Carson and Revenue Ruling 72-355. n285 However, the Clintons may have difficulty in finding "substantial" authority given that the authorities go both ways, as those authorities are defined by the IRS itself. In the hierarchy of standards, the next lowest for the Clintons to meet to avoid a 20% substantial understatement penalty would be reasonable [*38] basis with disclosure under $ S 6662(d). n286 Reasonable basis is, again, a "significantly higher" standard than not frivolous. n287

The Treasury Regulations accompanying the preparer penalty provision of $ S $ S 6694(a) and (b) provide two examples which may help illustrate whether the Clintons can meet the reasonable basis standard. n288 To avoid the preparer penalty, the preparer must have a realistic possibility of success (RPOS) n289 or a non-frivolous position and disclosure. n290 Example 4 of Regulation $ S 1.6694-3(d) presents a situation in which the basis for the tax position is a Tax Court decision that invalidates a final regulation requiring capitalization of certain expenses. n291 The Service's conclusion is that the preparer will be subject to the $ S 6694(b) penalty (reckless and intentional disregard of rules and regulations), even though there may be a realistic possibility of success, unless there is adequate disclosure. n292 Example 3 of the same regulation poses a situation in which the basis for the tax position is a Revenue Ruling, which holds that expenses must be capitalized, despite several court cases from different courts holding these expenses may be deducted. n293 In this example, the Service finds a reasonable possibility of being sustained on the merits and a preparer, therefore, may report the position without disclosure. n294 The Clintons' situation may be somewhere between examples 3 and 4 of Regulation $ S 1.6694-3(d) because one court case is clearly contrary to an IRS Revenue Ruling and non-acquiescence. Thus, the opposite position, at least presumably, would have RPOS or close to it. This may be just the sort of inside-out logic the Clintons are relying on to argue that the Service's position is also at least RPOS, i.e., a one in three chance of winning, and possibly even a reasonable basis. The Clintons may also be relying on the plaintiffs' attorney's fees cases where some plaintiffs have been successful in arguing that attorney's fees should in effect be excluded from income or, in other words, only their award [*39] net of attorney's fees should be included in income. n295 To the extent that some of these cases might bolster the Clintons' position, they still do not seem to be enough on their own to constitute substantial authority because there are contrary authorities. The IRS antiCarson position, plus some of the attorney's fees cases, might be enough to give the Clintons reasonable basis for their position of excluding the contributions to their legal defense trust. However, to avoid the substantial understatement penalty under $ S 6662(d), these taxpayers would need disclosure of their filing position in addition to reasonable basis. n296 As previously mentioned, the Clintons' tax return apparently did not disclose the exclusion of the contributions to the legal defense trust. n297 For the Clintons' preparer to avoid the $ 250 penalty of I.R.C. $ S 6694(a) or the $ 1000 penalty for willful, reckless, or intentional disregard of rules of regulations of $ S 6694(b), the preparer would need RPOS. n298 If the Clintons are close to achieving reasonable basis as immediately discussed above, then their preparer may have RPOS, the at least slightly lower standard of a one-in-three chance of winning. Without RPOS, the preparer would need a non-frivolous position and disclosure, n299 but again the Clintons have not disclosed the receipt of contributions by the legal defense trust on their 1040's for 1998 and 1999. At least the preparer might be able to avoid a penalty. n300 The higher $ 1000 penalty of $ S 6694(b) appears to be the penalty which the preparer most likely will avoid because the IRS has defined "rules and regulations" to include its own revenue rulings. n301 C. Application of Ethical Rules to the Clintons' Tax Return Preparer
n302

The preparer ethical standards seem generally to mimic the $ S 6694 penalty rules. n303 The standard for litigating a case in Tax Court is a nonfrivolous [*40] position. n304 Similarly, a preparer can avoid a penalty under $ S

6694(a) with a non-frivolous position and disclosure. n305 Otherwise, the preparer needs RPOS. The preparer clearly faces conflicting standards because, as discussed, to avoid a penalty, the taxpayer needs to meet the higher standards of either reasonable basis and disclosure or substantial authority. The American Institute of Certified Public Accountants (AICPA), the American Bar Association (ABA), and the IRS have set forth ethical guidelines that are generally in accord with the Tax Court and I.R.C. penalty provisions. For example, neither the old AICPA Statements on Responsibilities in Tax Practice, nor the new AICPA Statements on Standards for Tax Services express the realistic possibility standard in terms of percentage odds. n306 However, the realistic possibility standard is accepted in a 1985 ABA Formal Opinion. n307 Because the ABA Formal Opinion was issued before I.R.C. $ S 6694 was enacted, [*41] the opinion fails to mention disclosure for a non-frivolous position. n308 Instead, the opinion prescribes withdrawal when the lawyer does not have a good faith belief that there is a reasonable probability of success. n309 Treasury Department Circular 230, which governs practice before the IRS, states that the standards are now in accord with I.R.C. $ S 6694, as they require either a reasonable possibility of success n310 or a non-frivolous position and adequate disclosure. n311 Ethical matters may not be so easily quantifiable. The AICPA once required Certified Public Accountants (CPAs) to follow clear and unambiguous authorities. n312 More recently, in both the old and new Statements, the AICPA grants CPAs latitude to choose well-reasoned constructions of statutory authorities where rules are ambiguous. n313 Yet, the IRS does not appear to grant such latitude to tax return preparers. According to Treasury Regulation $ S 1.6694-2(b)(3), even judicial construction of an identical statute in another jurisdiction is not substantial authority even though, as with conclusions in treatises and periodicals, the authorities underlying the court's opinion may support a realistic possibility. n314 As for the Clintons' return preparer and meeting these ethical guidelines, it would appear that the closer the Clintons' filing position comes to RPOS because of the IRS's position on contributions to an individual politician as constituting gifts and some court cases excluding plaintiff's attorney's fees from judicial awards, the closer the preparer will be to avoiding not only a penalty but also any ethical sanction. VI. CONCLUSION The Clintons likely have income from payment of expenses by third parties according to Old Colony Trust Co. and a failure to meet the definition of a gift as outlined in Commissioner v. Duberstein. n315Still, the Clintons will likely be able to deduct their legal expenses as employee business expenses under cases such as Gilmore, Jenkins, and Salt, and more specifically cases dealing with politicians such as McDonald, Lussy, Messina, McDonald and Soloman. n316 [*42] If deducted, the Clintons will likely face an alternative minimum tax because their attorney's fees are not deductible for AMT.n317 However, the Clintons may try to rely on recent cases allowing a prevailing plaintiff to report net awards and thereby exclude their attorney's fees. n318 The Clintons, of course, would try to exclude their attorney's fees, despite the fact that they were defendants in the cases. n319 Furthermore, the Clintons may well be subject to a 20% substantial understatement penalty because their position may not have a substantial authority nor a reasonable basis plus disclosure. n320Even if the Clintons have reasonable basis, their failure to disclose the filing position of not reporting the contributions to the trust would require the penalty to be applied. Finally, the Clintons' tax return preparer may be able to

avoid penalty provisions and ethical violations because the preparer is only required to have a reasonable possibility of success even without disclosure. n321 All of these conclusions are, in a sense, predicated on an IRS audit of the Clintons. However, such an audit might never arise because of the IRS's still published position in the nonacquiesance rejecting Carson v. Commissioner. n322 Lack of an audit might be considered a failure to hold the Clintons accountable. At $ 7.4 million of legal fees paid by the Trust, n323 and at roughly a 28% AMT rate and a 20% substantial understatement penalty rate, the Clintons could owe nearly $ 2.1 million in tax and $ 420,000 in penalties. Legal Topics: For related research and practice materials, see the following legal topics: Estate, Gift & Trust LawPersonal GiftsElements of Valid GiftsDonative IntentEstate, Gift & Trust LawTrustsGeneral OverviewTax LawFederal Tax Administration & ProcedureTax Credits & LiabilitiesCivil Penalties (IRC secs. 6651-6751)AccuracyRelated Penalty FOOTNOTES: n1 The President's legacy of various, and often self-inflicted, turmoil has been chronicled extensively elsewhere. See, e.g., infra, note 164. See also Eric Lichtblau, Clinton Strikes Indictment Deal; Case Is Dropped as President Admits to False Testimony; Politics: Agreement in Lewinsky Sex Scandal Ends all of the Legal Fallout From Impeachment. He Will Lose Arkansas Law License for Five Years and Pay a $ 25,000 Fine, L.A. TIMES, Jan. 20, 2001, at A1 (regarding the last-day plea bargain); Deborah Zobar-Enko, Clinton's Cloud of Scandal, REUTERS, Jan. 19, 2001 (regarding Whitewater, Travelgate, Vince Foster, Filegate, Web Hubbell, and Monica). According to papers filed in the Arkansas Supreme Court investigation, Clinton's last-minute deal to avoid indictment was to pay $ 25,000 in costs to the Arkansas Supreme Court's Committee on Professional Conduct, agree to a five-year suspension of his law license, agree not to seek legal fees from the federal government regarding the Monica Lewinsky investigation, and admit that he "knowingly gave evasive and misleading answers" in a deposition. Clinton himself finally stated, "certain of my responses to questions about Ms. Lewinsky were false." Lichtblau, supra, at A1. And the fun never stops. Although Clinton agreed not to seek reimbursement for Monica-related fees, he might for others, including legal expenses of the impeachment. See Robert L. Jackson, Legal Fund for Clintons Falls Short in Final Accounting, L.A. TIMES, Mar. 15, 2001, at A27. Subsequently, the United States Supreme Court suspended Clinton from practicing before the Court. See Mark Helm, Clinton Law Privileges Eroded More; Supreme Court Suspends His License to Argue Before Justices, SEATTLE POSTINTELLIGENCER, Oct. 2, 2001, at A3. n2 See Lee A. Sheppard, A Look at the Clinton and Gore Tax Returns, 87 TAX NOTES 472, 473 (2000) (citing the ARKANSAS DEMOCRAT-GAZETTE, Feb. 24, 2000, at A1). See also Penchina Web Design LLC, Clinton Legal Expense Trust, at http://www.clintontrust.com (last updated Aug. 17, 2001) [hereinafter Clinton Legal Defense Trust website]. The First Presidential Legal Expense Trust Indenture was set up in June, 1994. See Kathleen Clark, Paying the Price for Heightened Ethics Scrutiny: Legal Defense Funds and Other Ways That Government Officials Pay Their Lawyers, 50 STAN. L. REV. 65, 114 (1997). The original Clinton trust, because it was

set up by the Clintons themselves, could not solicit donations. See id. at 150. That trust eventually returned all of the over $ 600,000 of donations. See id. at 119 n.276. See also Charles Lewis, Clinton Legal Defense Fund Mercenary Politics: Even Nixon Paid Bulk of His Bills Himself, SEATTLE POST-INTELLIGENCER, Mar. 4, 1999, at A15. On March 14, 2001, in its sixth semi-annual report, the second trust announced it had collected $ 8.7 million and paid $ 7.4 million of Bill and Hillary Clinton's $ 11.3 million expenses. See Clinton Legal Defense Trust website, supra. n3 See Sheppard, supra note 2, at 473. The legal expenses of Hillary Clinton, as well as Bill Clinton, will be discussed in this Article. At least some of Hillary's legal expenses have been paid by the trust, but it is not clear which investigations gave rise to which expenses. See Jackson, supra note 1, at A27 and Clinton Legal Defense Trust website, supra note 2. "Whitewater" initially involved an investment in Arkansas by both Hillary and Bill, and presumably could generate deductible legal expenses. Fellow attorney Web Hubbel's investigation involved Hillary's employment at the Rose Law Firm and, thus, also potentially deductible legal expenses. Travelgate and Filegate involved Hillary's alleged machinations as first lady, not an employee position, and, therefore, it seems, legal fees paid on behalf of Hillary are not deductible legal expenses. Vince Foster's suicide, itself a murky matter, is similarly unclear regarding deductible expenses. But, if Foster were working on the Rose Law Firm records or the Whitewater investment at the time of his death, presumably expenses regarding the subsequent investigation could yield deductions. For more information regarding the various scandals giving rise to Hillary's legal expenses, see, e.g., Francis X. Clines, The First Lady Under Oath; Hillary Clinton Answers Grand Jury's Questions About Law Firm's Billing Records and "Other Matters," THE AUSTIN AMERICAN-STATESMAN, Jan. 27, 1996, at A1; Steve Barnes, A Draft Indictment Named First Lady; Jury Never Got Starr Aide's Document, THE AUSTIN AMERICANSTATESMAN, Mar. 19, 1999, at A3. "Hillary Clinton was named in an indictment drafted by a top aide to Kenneth Starr, the independent counsel, but the document was never presented to a grand jury . . . ." Robert L. Jackson, Travelgate Inquiry Suggests Signs of Lies by First Lady; Politics: Independent Counsel Says He Will Not Seek to Indict Her, But Memos Indicate Hillary Clinton Had a Role in Firings, L.A. TIMES, June 23, 2000, at A1. Jackson also wrote about a prototypical exchange of comments between the independent counsel and the Clinton administration: There is "substantial evidence" that the First Lady Hillary Rodham Clinton lied under oath . . . But [independent counsel Robert W.] Ray . . . said he will not seek to indict Mrs. Clinton because he cannot prove beyond a reasonable doubt that any of her testimony was false . . . The White House declares the report a vindication of the first lady . . . There is no evidence the first lady did anything wrong," said spokesman Joe Lockhart. Jackson, supra note 1, at A27. n4 279 U.S. 716 (1929). n5 See id. at 731. n6 See Rev. Rul. 73-356, 1973-2 C.B. 31; Rev Rul. 75-146, 1975-1 C.B. 23; Rev. Rul. 76-276, 1976-2 C.B. 14. n7 See Rev. Rul. 73-356, 1973-2 C.B. 31; Rev Rul. 75-146, 1975-1 C.B. 23; Rev. Rul. 76-276, 1976-2 C.B. 14.

n8 363 U.S. 278 (1960). In Duberstein, the Supreme Court stated that "a gift in the statutory sense . . . proceeds from a 'detached and disinterested generosity.'" Id. at 285. n9 See Clark, supra note 2, at 114 and accompanying text; Lee A. Sheppard, News Analysis: The Tax Treatment of the Clintons' Legal Defense Fund, 64 TAX NOTES 12, 12-13 (1994). n10 See Clark, supra note 2, at 147 and accompanying text (citing 5 C.F.R. 2635.201-.304 (1996)). n11 See id. at 114-16. n12 Jackson, supra note 1, at A27. See also Lewis, supra note 2, at A15. The first trust was shut down in December 1997 after it was reported that Yah Lin Trie, an Arkansas restaurateur, showed up in the defense fund's Washington offices trying to donate $ 460,000 in sequentially numbered money orders. Later he was indicted for campaign finance abuses. See Lewis, supra note 2, at A15. n13 See Robert L. Jackson, Clinton Bills Top Legal Fund by $ 4 Million Defense: Trustees Say That Despite $ 6.3 Million in Private Giving, the President and his Wife Owe So Much That Solicitations Will Continue Indefinitely, L.A. TIMES, Aug. 13, 1999, at A22. n14 See Lee A. Sheppard, Clinton Legal Defense Fund II: What Was the Bill from the Tax Lawyers?, 78 TAX NOTES 1226, 1226 (1998). n15 See Clark, supra note 2, at 148 (citing Ann Devroy & Ruth Marcus, Clinton Aides Setting Up Defense Funds to Pay Lawyers' Bills, WASH. POST, Feb. 29, 1996, at A21). n16 Although there are no limits on the size of contributions according to the Office of Government Ethics, the second trust only accepts gifts up to $ 10,000. This limit is probably to ensure that all donations qualify for the gift tax exclusion. n17 See Old Colony Trust Co. v. Comm'r, 279 U.S. 716 (1929). n18 See id. at 729-30. n19 Id. at 729. n20 See id. at 730. n21 Id. n22 773 F.2d 397 (2d Cir. 1985). n23 See id. at 406-07. n24 See id. at 406. According to the Supreme Court, the determination of whether a gift has been made "must be based ultimately on the application of the factfinding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case." Duberstein, 363 U.S. at 283. n25 See Pisani, 773 F.2d at 406.

n26 1968-1 C.B. 810. n27 Pisani, 773 F.2d at 406. n28 See id. n29 1954-1 C.B. 11. n30 See Pisani, 773 F.2d at 406 (citing Rev. Rul. 54-80, 1954-1 C.B. 11, 12). n31 See id. (citing Rev. Rul. 54-80, 1954-1 C.B. 11 and Rev. Proc. 68-19, 1968-1 C.B. 810). n32 54 T.C. 255 (1970). n33 Id. at 280. n34 Id. at 281. n35 Id. n36 See Comm'r v. Duberstein, 363 U.S. 278, 280 (1960). n37 See id. at 280-81. n38 Id. at 285. The Court did not find the "detached and disinterested generosity" necessary to prove a gift in the facts of Duberstein. See id. Instead, the Court found that despite the fact that the donor was in no way obligated to give the Cadillac, "it was at bottom a recompense for Duberstein's past services, or an inducement for him to be of further service in the future." Id. n39 1960-1 C.B. 16. n40 See id. n41 See id. at 17. n42 Id. at 18. n43 See id. n44 1973-2 C.B. 31. n45 See id. at 32. n46 See id. n47 Id. n48 Hereinafter "I.R.C." n49 See Rev. Rul. 73-356, 1973-2 C.B. 31, 32. n50 See id. at 33 (stating that "expenses attributable to the performance of a trade or business as an employee are deductible only in computing taxable income").

n51 See id. Such below-the-line employee business expenses, although deductible for regular income tax, are not deductible for alternative minimum tax (AMT) purposes, as discussed below, often resulting in a large AMT liability. See infra notes 204-49 and accompanying text. n52 1975-1 C.B. 23. n53 See id. at 23. n54 Id. n55 1976-2 C.B. 15. n56 See id. at 15. n57 Id. n58 See id. n59 See supra notes 39-58 and accompanying text. n60 See supra notes 39-58 and accompanying text. n61 1960-1 C.B. 16. n62 See id. at 17. n63 See Rev. Rul. 73-356, 1973-2 C.B. 31, 33. n64 See Rev. Rul. 75-146, 1971-1 C.B. 23, 23. n65 See Rev. Rul. 76-276, 1976-2 C.B. 14, 14. n66 United States v. Pisani, 773 F.2d 397, 406 (2d Cir. 1985). n67 See Stratton v. Comm'r, 54 T.C. 255, 281 (1970) (stating that "several . . . witnesses . . . testified unequivocally that they intended to make outright gifts . . . ." (emphasis added)). However, even though self-serving evidence may be used to satisfy the unrestricted personal use test, such evidence may not be used to satisfy the Duberstein test. See Comm'r v. Duberstein, 363 U.S. 278, 286 (1960). n68 See Rev. Rul. 76-276, 1976-2 C.B. 15, 15 (quoting Mount Vernon Gardens, Inc. v. Comm'r, 298 F.2d 712 (6th Cir. 1962) ("The creation of a trust . . . is not in and of itself sufficient to prevent the trust money from being treated as income.")). n69 Id. at 15 (quoting Mount Vernon Gardens, Inc. v. Comm'r, 298 F.2d 712 (6th Cir. 1962)). n70 Id. n71 The fact that the President may lack willpower to control certain urges and then decides to hire attorneys would not appear to be viable arguments that he could not control distribution of the funds from the trust. n72 1968-1 C.B. 810.

n73 United States v. Pisani, 773 F.2d 397, 406 (2d. Cir. 1985) (quoting Rev. Proc. 6819, 1968-1 C.B. 810, 811). n74 See Sheppard, supra note 9, at 13. n75 See Sheppard, supra note 14, at 1228. n76 See id. at 1229. See also infra notes 198-203 and accompanying text. There is some support for the position that, if defending one's business reputation generates legal expenses, such expenses resulted from a legal claim originating from one's trade or business. See Jenkins v. Comm'r, 47 T.C.M. (CCH) 238 (1983) (The Conway Twitty case). See also infra notes 126-133 and accompanying text. n77 See O'Malley v. Comm'r, 91 T.C. 352 (1988). n78 91 T.C. 352 (1988). n79 See id. at 361. n80 See id. at 366. n81 See id. at 359. n82 See id. at 359-60. n83 See id. at 360. n84 The Clinton situation could only involve so many government employees or friends who might contribute and might have their own legal problems. See Ann Devroy & Ruth Marcus, Clinton Aides Setting Up Defense Funds to Pay Lawyers' Bills, WASH. POST, Feb. 29, 1996, at A1; Lewis, supra note 2, at A15. n85 See infra notes 119-203 and accompanying text. n86 O'Malley, 91 T.C. at 363-64 (citing Primuth v. Comm'r, 54 T.C. 374 (1970)). n87 Id. at 364. n88 See id. at 366. n89 See id. at 366. See also Groetzinger v. Comm'r, 771 F.2d 269 (7th Cir. 1985). n90 The Clintons' possible alternative minimum tax problem is discussed in Part IV below. See infra notes 204-49 and accompanying text. n91 71 T.C. 252 (1978), aff'd, 641 F.2d 864 (10th Cir. 1981), nonacq., 1971-2 C.B. 2. n92 The Teamsters endorsed Richard Nixon for President in 1972. See, e.g., Lionel Van Deerlin, Marriage of Convenience on Rocks, SAN DIEGO UNION-TRIBUNE, July 5, 1988, at B7. n93 See Carson, 71 T.C. 252 (1978), aff'd, 641 F.2d 864 (10th Cir. 1981) nonacq. 1971-2 C.B.2. See also infra note 104 and accompanying text. The suggestion that the Clintons would look to Nixon as a model is not that farfetched. Hillary Clinton served as a young attorney on the staff of the Democrats' attorney for the Senate

Nixon impeachment committee. See The Daily Telegraph, How Hillary Tried to Save Nixon: First Lady has Experience With Impeachment, THE OTTAWA CITIZEN, Sept. 11, 1998, at A3. n94 See Carson, 71 T.C. at 253-54. n95 See id. at 256. n96 Id. at 258. n97 See id. n98 Id. at 261. Although the Supreme Court in Duberstein may have suggested that there are differences in the definition of "gift" for income tax purposes and gift purposes and despite the fact that the definitional language is different, the two definitions are similar and many courts, including the Carson court, seem to act, with good reason, it seems, as if there is no or little difference. See id.;Comm'r v. Duberstein, 363 U.S. 278, 284. In Duberstein, Justice Brennan, writing for the majority concerning the income tax definition of "gift," stated: "Analogies and inferences drawn from other revenue provisions, such as estate and gift taxes, are dubious." Id. at 286. However, Justice Brennan also rejected "donative intent" and required "an objective inquiry" of a gift. Id. Similarly, in Comm'r v. Wemyss, 65 U.S. 652 (1945), the Supreme Court, in defining "gift" for gift tax purposes rejected, donative intent and required an objective inquiry. The two definitions of "gift," of course, arise from different statutory sources, I.R.C. 102 for income tax and I.R.C. 2512(b) for gift tax. Definitionless 102 has resulted in interpretations such as Duberstein's "disinterested and detached generosity." On the other hand, 2512(b) actually provides the definition "less than an adequate and full consideration." If in practicality there is any real difference in these definitions, it seems difficult to fathom. For example, when the court ruled in Carson that transfers to politicians were, by an objective test, to influence the social framework and therefore not gifts under the gift tax, aren't such same transfers not with a disinterested and detached motive to qualify as gifts under the income tax? n99 Carson, 71 T.C. at 264 (Tannenwald, J., concurring). n100 Id. at 265 (Hall, J., concurring). n101 See id. at 275 (Simpson, J., dissenting). n102 See id. at 257 n.5. n103 See id. n104 See Kip Dellinger, Let's See an IRS Ruling on Clinton Legal Defense Fund, 94 TAX NOTES TODAY 141-64 (1994), in which the author explains the following: In the mid-'70s, I found myself in the ironic position of representing different contributors to each party who were challenged by the IRS. The amounts involved exceeded $ 700,000. Interestingly, our arguments and those made by others challenged on these donations followed along the lines that there was no donative intent involved; that, in fact, the donors intended to gain something from their contributions. That something was to advance their own political and social

objectives. The Carson case (Carson v. Comm'r, 71 T.C. 252 (1978), aff'd 641 F.2d 864 (10th Cir. 1981), nonacq 1979-2 C.B. 2) arrived at essentially the same conclusion. In all three of the cases I was involved with, they were placed in suspense and the proposed assessment later withdrawn. See also Rev. Rul. 72-355, 1972-2 C.B. 532. n105 See I.R.C. 2503(b) (1994). See also Sheppard, supra note 14, at 1226-28. n106 397 F.2d 82 (9th Cir. 1968). n107 See id. at 82. n108 97 T.C. 74 (1991). n109 See id. at 74. n110 See Sheppard, supra note 14, at 1226. n111 73 T.C.M. (CCH) 3236 (1997). n112 See id. at 3237. n113 See id. n114 See id. (stating that "if the beneficiaries, trustees, and donor had an agreement or understanding that limited the ability in the legal sense, of the beneficiaries to exercise their right to withdraw the trust corpus, then the beneficiaries may not have received gifts of a present interest"). n115 See Sheppard, supra note 14, at 1227-28. n116 See Kip Dellinger, The Clinton Legal Defense Funds: Tax Return Compliance Issues, 78 TAX NOTES 1719, 1726 (1998). n117 See id. n118 See id. n119 See I.R.C. 162, 212 (1994). Additionally, personal expenditures are not deductible under I.R.C. 262 (1994). n120 See I.R.C. 162, 212 (1994). n121 372 U.S. 39 (1963), rev'g 290 F.2d 942 (Ct. Cl. 1961). n122 See id. n123 Id. at 49. n124 Boagni v. Comm'r, 59 T.C. 708, 713 (1973). n125 See generally John R. Dorocak, Sports and Entertainment Figures (and Others) May be Able to Deduct Legal Expenses for Criminal Prosecutions (and Wrongful Death Suits), 13 AKRON TAX J. 1 (1997).

n126 47 T.C.M. (CCH) 238 (1983). n127 Conway Twitty's legal name is Harold Jenkins. See id. at 238. n128 Although these payments were debts to third parties, rather than legal expenses, the case provides guidance for deducting legal expenses because both are deducted as trade or business expenses under I.R.C. 162 (1994). n129 See Jenkins, 47 T.C.M. (CCH) 238. n130 Id. at 244. n131 Id. at 246. n132 Id. n133 Id. at 247 n.14. n134 18 T.C. 182 (1952). n135 See id. at 184-85. n136 Id. at 186. n137 See David R. Brennan & Susan L. Megaard, Deducting Legal Costs of Defending Against Claims of Sexual Harassment in the Workplace, 84 J. TAX'N 94 (1996); Sheppard, supra note 9, at 12-14; Robert W. Wood, Letters to the Editor: The Taxing Matter of Bill's Legal Bills, 78 TAX NOTES 1567, 1567 (1998). n138 323 U.S. 57 (1944). n139 See McDonald, 323 U.S. at 63-65. Currently, I.R.C. 162(e)(1)(B) (2001) prohibits deductions of any amount paid in connection with any candidate for public office. See also Gen. Couns. Mem. 38,112 (Sept. 27, 1979) (regarding a public official deducting legal expenses for defense in a lawsuit regarding statements and release of documents). n140 320 U.S. 467 (1943). Heininger was cited by Salt v. Comm'r, 18 T.C. 182 (1952), discussed above. See supra notes 134-36 and accompanying text. n141 See Heininger, 320 U.S. at 470-71. See also Theodore M. David, Getting Away With Murder? Deductibility of Criminal Defense Expenses, 10 PRAC. TAX LAW. 63, 7071 (1996). n142 1971-2 C.B. 121. n143 See id. at 121. n144 See id. n145 See id. (citing McDonald v. Comm'r, 323 U.S. 57 (1944) and Comm'r v. Heininger, 320 U.S. 467 (1943)). n146 1974-2 C.B. 40.

n147 See id. at 40. The facts of this ruling differ from McDonald because in the ruling the judge was merely defending against charges of misconduct after he was in office, while in McDonald, the judge was trying to get elected to office. The trade or businesses of the two taxpayers were different. See id. n148 383 U.S. 687 (1966). n149 See Rev. Rul. 74-394, 1974-2 C.B. 40 (citing Comm'r v. Tellier, 383 U.S. 687 (1966)). n150 See Tellier, 383 U.S. at 687. n151 Rev. Rul. 74-394, 1974-2 C.B. 41, 41. n152 I.R.C. 162 (1994). Section 162(a) provides that "there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Id. n153 70 T.C.M. (CCH) 427 (1995). n154 See id. at 428. n155 See id. n156 Id. at 429. According to the court, "the lawsuit arose from a traffic violation that was unrelated to petitioner's income-producing activities." Id. n157 202 Ct. Cl. 155 (1973). n158 See id. at 157-58. The charge of sexual perversion was not described any further in the reported case. See id. n159 Id. at 159. n160 Id. n161 See Lussy, 70 T.C.M. at 428. n162 See Messina, 202 Ct. Cl. at 157. n163 See Jackson supra note 13, at A22 ("The Clintons' legal obligations totaled about $ 10.5 million from independent counsel Kenneth W. Starr's inquiry, the Paula Corbin Jones sexual harassment lawsuit and the congressional impeachment battle . . . ."). n164 If anyone doubts that Clinton lied under oath, District Court Judge Susan Webber Wright, in holding Clinton in civil contempt of court, concluded, "Simply put, the President's deposition testimony regarding whether he had ever been alone with Ms. Lewinsky was intentionally false and his statements regarding whether he had ever engaged in sexual relations with Ms. Lewinsky likewise were intentionally false." Jones v. Clinton, 36 F. Supp. 2d 1118, 1130 (E.D. Ark. 1999). Judge Wright later ordered Clinton to pay over $ 90,000 ($ 90,686.05) in court costs and opposing counsels' fees. SeeJones v. Clinton, 57 F. Supp. 2d 719, 729 (E.D. Ark. 1999). Judge Wright, and some members of Congress, apparently concluded that Clinton also lied in his grand jury testimony since Judge Wright also wrote, "At his August 17th

appearance before the grand jury, the President directly contradicted his deposition testimony by acknowledging that he had indeed been alone with Ms. Lewinsky on a number of occasions during which they engaged in 'inappropriate intimate contact.'" Jones, 36 F. Supp. 2d at 1128. In a footnote, she explained as follows: The President seemed to accept OIC's characterization of his improper contact with Ms. Lewinsky as "some kind of sex" and as a "physically intimate" relationship. Pres. GJ Test. at 123, 136. Although the President did not disclose any specific sexual acts between himself and Ms. Lewinsky, he did state that oral sex performed by Ms. Lewinsky on himself would not constitute "sexual relations" as that term was defined by plaintiff at his deposition. Id. at 93, 100, 102, 104-05, 151-52, 168. It appears the President is asserting that Ms. Lewinsky could be having sex with him while, at the same time, he was not having sex with her. Jones, 36 F. Supp. 2d at 1130 n.16. Also, Judge Wright succinctly summarized the conclusions of the independent counsel, the House, and the Senate. See generally Jones, 36 F. Supp. 2d 1118. In addition, she called attention to Clinton's settlement payment to Jones of $ 850,000. See id. at 1123. On September 9, 1998, the Independent Counsel, having concluded there was substantial and credible information that the President committed acts that may constitute grounds for impeachment, submitted his findings from his investigation of the Lewinsky matter to the United States House of Representatives pursuant to 28 U.S.C. 595(c). The House of Representatives thereupon commenced impeachment proceedings, ultimately passing two Articles of Impeachment against the President, one alleging perjury in his August 17th testimony before the grand jury and the other alleging obstruction of justice in this civil case. The matter then proceeded to trial in the United States Senate. On November 13, 1998, while the impeachment proceedings were taking place in the House of Representatives, the plaintiff reached an out-of-court settlement for $ 850,000 and withdrew her appeal of this Court's April 1st decision granting summary judgment to defendants. See Jones v. Clinton, 161 F.3d 528 (8th Cir 1998); 36 F. Supp. 2d at 1123. Thereafter, on February 12, 1999, the Senate acquitted the President of both Articles of Impeachment. See id. at 1130. Perhaps most damningly, Clinton's own attorney had to admit to Judge Wright that his client's testimony was "misleading and not true." Indeed, even though the President's testimony at his civil deposition was entirely consistent with Ms. Lewinsky's affidavit denying "sexual relations" between herself and the President, the President's attorney later notified this Court pursuant to his professional responsibility that portions of Ms. Lewinsky's affidavit were reported to be "misleading and not true" and that this Court should not rely on Ms. Lewinsky's affidavit or remarks of counsel characterizing that affidavit. See Letter of September 30, 1998. The President's testimony at his deposition that Ms. Lewinsky's denial in her affidavit of a "sexual relationship" between them was "absolutely true" likewise was "misleading and not true." Jones, 36 F. Supp 2d at 1130 n.15. n165 See Jones, 36 F. Supp. 2d at 1120 & n.2.

n166 See id. at 1121. n167 See supra note 3 and accompanying text. n168 592 F.2d 635 (2d Cir. 1978). n169 See id. at 637-38. n170 33 T.C.M. (CCH) 588 (1974). n171 See Soliman v. Comm'r, 506 U.S. 168 (1993), rev'g 935 F.2d 52 (4th Cir. 1991), 94 T.C. 20 (1990). n172 See Solomon, 33 T.C.M. (CCH) at 588. n173 See Brennan & Megaard, supra note 137. n174 56 T.C.M. (CCH) 851 (1988). n175 See id. at 853. n176 See id. at 851-52. n177 See id. at 853. n178 See id. n179 71 F.2d 68 (9th Cir. 1934). n180 See id. at 68. n181 See Brennan & Megaard, supra note 137, at "Problems with the Furtherance Test." n182 73 T.C. 1103 (1980). n183 See id. at 1103. n184 See id. at 1108-09. n185 See id. n186 30 T.C. 1330 (1958). n187 See id. at 1332-33. n188 See id. at 1336-37. n189 Hereinafter "G.C.M." n190 Gen. Couns. Mem. 38,112 (Sept. 27, 1979). n191 See Brennan & Megaard, supra note 137, at "Deductions in Harassment Cases." n192 See id.

n193 257 F. Supp. 312 (D.S.C. 1966). n194 See id. at 313. n195 See id. at 313-14 n.2. n196 See id. at 314. n197 See Brennan & Megaard, supra note 137, at "Deductions in Harassment Cases." P If a claim arising from personal activities results in a claim unrelated to the taxpayer's business, however, the legal expenses will be nondeductible. The court in Finger thus denied a doctor's deduction for legal fees because (1) the claim originated from the doctor's personal relations with his office nurse and (2) the claim by the nurse's husband for loss of consortium was unrelated to the doctor's business. See Finger, 257 F. Supp. 312. It is the relation of the claim to the taxpayer's business and not the nature of the claimant's injury that determines the deductibility of the taxpayer's legal costs. For example, an additional claim by the nurse's husband seeking lost wages for his wife would not have made Finger's legal expenses deductible, because the husband's claims were unrelated to Finger's medical practice. By contrast, had the nurse herself charged Finger with either harassment or tortious conduct in the workplace, presumably the fees would have been deductible. Id. n198 See Sheppard, supra note 9, at 15; Sheppard, supra note 14, at 1229-30. n199 See supra notes 126-33 and accompanying text. n200 See generally Jenkins v. Comm'r, 47 T.C.M. 238 (1983) (The Conway Twitty case); Draper v. Comm'r, 26 T.C. 201 (1956); Dorocak, supra note 125. n201 See Oden v. Comm'r, 56 T.C.M. (CCH) 851, 851-52 (1988); Pantages Theatre Co. v. Welch, 71 F.2d 68, 68 (9th Cir. 1934). n202 See supra notes 121-25, 189-90 and accompanying text. n203 See Jackson, supra note 13, at A22. See also Clines, supra note 3, at A1; supra note 2 and accompanying text. n204 See Alexander v. Comm'r, 69 T.C.M. (CCH) 1792 (1995) (citing I.R.C. 162(a) (trade or business expenses deductible), 62(a)(1) (employee business expenses not deducted for AGI), 67(a) (imposing the 2% for miscellaneous itemized deductions)). n205 See id. at 1792 (citing I.R.C. 55 and 56(b)(1) (disallowing miscellaneous itemized deductions as defined in 67(b))). See also Kip Dellinger, The Clinton Legal Defense Fund: The Tax Issue Remains Unanswered, 97 TAX NOTES TODAY 159-44 (1997); Sheppard, supra note 2 at 472-474. n206 See Fifth Circuit Reverses Tax Court -Contingent Attorney Fees From Settlement Excluded From Gross Income, 88 TAX NOTES 640 (2000); Deborah A. Geier, Some

Meandering Thoughts on Plaintiffs and Their Attorneys' Fees and Costs, 88 TAX NOTES 531 (2000); Robert W. Wood, Even Tax Court Itself Divided on Attorneys' Fees Issue!, 88 TAX NOTES 573 (2000); Robert W. Wood, Letters to the Editor: Attorney's Fees: A Few More Observations, 88 TAX NOTES 701 (2000). n207 See supra notes 204-05 and accompanying text. n208 See supra note 206. This currently hot topic of whether a plaintiff-taxpayer can truly deduct or exclude attorney's fees from an award or settlement is thoroughly discussed elsewhere. See supra note 206. This topic is raised here only for the proposition that the Clintons might try to use the theories being developed regarding plaintiff's legal fees to exclude or deduct their defendants' legal fees. n209 263 F.2d 119 (5th Cir. 1959). n210 See id. at 119. n211 See id. at 122. n212 See id. at 127. n213 311 U.S. 112 (1940). n214 See id. at 127. See also Old Colony Trust Co. v. Comm'r, 279 U.S. 716 (1929); Helvering, 311 U.S. 112. n215 Cotnam, 263 F.2d at 125. n216 See id. at 126. n217 See id. at 120-25. n218 See id. at 125. n219 See Estate of Clarks v. United States, 202 F.3d 854 (6th Cir. 2000); Coady v. Comm'r, 213 F.3d 1187 (9th Cir. 2000); Baylin v. United Sates, 43 F.3d 1451 (Fed. Cir. 1995); Kenseth v. Comm'r, 114 T.C. 399 (2000). n220 202 F.3d 854 (6th Cir. 2000). n221 See id. at 855. n222 See id. n223 See id. at 855-58. n224 See id. at 856. n225 43 F.3d 1451 (Fed. Cir. 1995). n226 See id. at 1454-55. n227 See id. at 1452.

n228 See id. at 1455. n229 See id. at 1453-54. n230 213 F.3d 1187 (9th Cir. 2000). n231 See id. at 1189-91. n232 Id. at 1190. n233 See id. n234 See id. at 1191 (citing Lucas v. Earl, 281 U.S. 111 (1930); Helvering v. Horst, 311 U.S. 112 (1940)). n235 Geier, supra note 206, at 549. n236 114 T.C. 399 (2000). n237 See id. n238 See id. at 400. n239 See id. at 401-02. n240 See id. at 417. n241 See id. at 413-14, 413 n.7 and accompanying text. n242 See id. at 417-21 (Chabot, J., dissenting). n243 Id. at 425 (Beghe, J., dissenting). n244 See supra notes 204-05 and accompanying text. n245 See supra notes 68-70 and accompanying text. n246 See Kenseth, 114 T.C. at 417-21 (Chabot, J. dissenting). n247 See id. n248 See id. at 420-41. n249 See id. n250 For further discussion on taxpayer and tax preparer penalties, see John R. Dorocak, Potential Penalties and Ethical Problems of a Filing Position: Not Reporting Gain on the Expiration of a SCIN After -Estate of Frane v. Comm'r, 23 U. DAYTON L. REV. 217 (1998) [hereinafter Potential Penalties and Ethical Problems of a Filing Position]; John R. Dorocak, Potential Penalties and Ethical Problems in Filing an Amended Return: The Case of the Repentant Sports/Entertainment Figure's Legal Expenses Deduction, 52 ME. L. REV. 1, 9-13 (2000) [hereinafter Potential Penalties and Ethical Problems in Filing an Amended Return]. n251 See supra note 3 and accompanying text.

n252 See I.R.C. 6662 (1994). A substantial understatement of income tax for a taxable year is an understatement that is greater than 10% of the income tax required to be reported on the taxpayer's tax return or $ 5000. See I.R.C. 6662(d)(1)(A) (1994). For corporations, however, an substantial understatement is an amount that exceeds the greater of 10% of the income tax required to be reported on the tax return or $ 10,000. See I.R.C. 6661(d)(1)(B) (1994). n253 See I.R.C. 6662(a) (1994). n254 See I.R.C. 6662(d) (1994). I.R.C. 6662(d)(2)(B) (1994) states: (B) Reduction for understatement due to position of taxpayer or disclosed item. The amount of the understatement under subparagraph (A) shall be reduced by that portion of the understatement which is attributable to (i) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment, or (ii) any item if (I) the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and (II) there is a reasonable basis for the tax treatment of such item by the taxpayer. Treasury Regulation 1.6662-7 (2000) states: "For purposes of sections 1.6662-3 and 1.6662-4(e) and (f) (relating to methods of making adequate disclosure), the provisions of 1.6662-3(b)(3) apply in determining whether a return position has a reasonable basis." n255 The "more likely than not" standard is met when there is a greater than 50% likelihood of the position being upheld. See Treas. Reg. 1.6662-4(d)(2)(2000). n256 Defined as reasonable reliance on one or more of the authorities permitted to be used to establish substantial authority. See Treas. Reg. 1.6662-3(b)(3), 1.66627(d) (2000). n257 Treas. Reg. 1.6662-4(d)(3) (2000). n258 See Treas. Reg. 1.6662 -4(d)(3)(iii) (2000). n259 Id. n260 See I.R.C. 6662(d)(2)(B) (1994). n261 Treas. Reg. 1.6662-3(b)(3) (2000) ("Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper."). See also Dorocak, supra note 250; Potential Penalties and Ethical Problems of a Filing Position; Dorocak, Potential Penalties and Ethical Problems in Filing an Amended Return, supra note 250. n262 See Treas. Reg. 1.6662-7(d), 1.6662-3(b)(3) (2000). See also Lawrence M. Hill & Steven A. Sirotic, Prop. Regs. Heighten the "Reasonable Basis" Standard for

Return Positions, 28 TAX ADVISER 6, 496 (1997). Regulation 1.6662-7 refers to Regulation 1.6662-3(b)(3) "in determining whether a return position has a reasonable basis." Treas. Reg. 1.6662-7 (2000). Regulation 1.6662-3(b)(3) (2000) states: Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim. If a return position is reasonably based on one or more of the authorities set forth in 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments), the return position will generally satisfy the reasonable basis standard even though it may not satisfy the substantial authority standard as defined in 1.6662-4(d)(2). Additionally, see Treasury Regulation 1.6662-4(d)(3)(ii) (2000) for rules with respect to relevance, persuasiveness, subsequent developments, and use of a wellreasoned construction of an applicable statutory provision for purposes of the substantial understatement penalty. In addition, the reasonable cause and good faith exception in 1.6664-4 may provide relief from the penalty for negligence or disregard of rules or regulations, even if a return position does not satisfy the reasonable basis standard. See Treas. Reg. 1.6662-3(b)(3) (2000). n263 See I.R.C. 6662 (1994). n264 See Treas. Reg. 1.6662-3(b)(3) (2000). n265 See Treas. Reg. 1.6662-1, 1.6664-4 (2000). n266 Treas. Reg. 1.6664-1(b) (2000). n267 " Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer." Treas. Reg. 1.6664-1(b) (2000). n268 See I.R.C. 6694 (1994). n269 See I.R.C. 6694(a) (1994). n270 See I.R.C. 6694(b) (1994). n271 Treas. Reg. 1.6694-3(f) (2000). n272 See I.R.C. 6694(a) (2001). I.R.C. 6694(a) (2001) reads: Understatements due to unrealistic positions. If: (1) any part of any understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits. (2) any person who is an income tax return preparer with respect to such return or claim knew (or reasonably should have known) of such position, and (3) such position was not disclosed as provided in section 6662(d)(2)(B)(ii) or was

frivolous, such person shall pay a penalty of $ 250 with respect to such return or claim unless it is shown that there is reasonable cause for the understatement and such person acted in good faith. n273 See Treas. Reg. 1.6694-2(b)(1) (1994). Regulation 1.6694-2(b)(1) (1994) reads: Realistic possibility of being sustained on its merits: (1) In general. A position is considered to have a realistic possibility of being sustained on its merits if a reasonable and well-informed analysis by a person knowledgeable in the tax law would lead such a person to conclude that the position has approximately a one in three, or greater, likelihood of being sustained on its merits (realistic possibility standard). In making this determination, the possibility that the position will not be challenged by the Internal Revenue Service (e.g., because the taxpayer's return may not be audited or because the issue may not be raised on audit) is not to be taken into account. The analysis prescribed by 1.6662-4(d)(3)(ii) for purposes of determining whether substantial authority is present applies for purposes of determining whether the realistic possibility standard is satisfied. n274 See Treas. Reg. 1.6694-2(c)(2) (2000). n275 A one-third or greater likelihood of being sustained on the merits. See Treas. Reg. 1.6694-2(c)(3) (2000). n276 See Treas. Reg. 1.6694-3(c)(2) (2000). n277 See Treas. Reg. 1.6662-3(c)(2) (2000); Rev. Proc. 97-56, 1997-2 C.B. 582. n278 See Treas. Reg. 1.6694-3(d) example 3, 4 (2000). n279 See Treas. Reg. 1.6694-2(d) (2000). n280 Treas. Reg. 1.6694-2(d)(1) (2000). n281 See supra note 3 and accompanying text. n282 See supra note 3 and accompanying text. n283 See Treas. Reg. 1.6662-4(d)(3)(iii) (2000). Regulation 1.6662-4(d)(3)(iii) (2000) provides: Types of authority. Except in cases described in paragraph (d)(3)(iv) of this section concerning written determinations, only the following are authority for purposes of determining whether there is substantial authority for the tax treatment of an item: Applicable provisions of the Internal Revenue Code and other statutory provisions; proposed, temporary and final regulations construing such statutes; revenue rulings and revenue procedures; tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties; court cases; congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers: General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book); private letter rulings and technical advice memoranda issued after October 31, 1976; actions on decisions and general counsel memoranda issued after March 12, 1981 (as well as general

counsel memoranda published in pre-1955 volumes of the Cumulative Bulletin); Internal Revenue Service information or press releases and notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin. n284 See generally Carson v. Comm'r, 71 T.C. 252 (1978), aff'd, 641 F.2d 864 (10th Cir. 1981), nonacq. 1979-2 C.B. 2. See also supra notes 91-104 and accompanying text. n285 See generally Carson, 71 T.C. 252 (1978), aff'd, 641 F.2d 864 (10th Cir. 1981), nonacq. 1979-2 C.B. 2. See generally also Rev. Rul. 72-355, 1972-2 C.B. 532; Rev. Rul 72-355, 1972-2 C.B. 532.See also supra note 103 and accompanying text. n286 See supra notes 260-63 and accompanying text. One is hard pressed to resist suggesting that the Clintons have had difficulties in meeting even lowered standards. n287 See Treas. Reg. 1.6662-3(b)(3) (2000). n288 See Treas. Reg. 1.694-3(d) example 3, 4 (2000). See also Dorocak, Potential Penalties and Ethical Problems of a Filing Position, supra note 26150. n289 Defined as a one-third or greater likelihood of being sustained on the merits. See Treas. Reg. 1.6694-2(b)(1) (2000). n290 A frivolous position is one which is patently improper. See Treas. Reg. 1.66942(c)(2) (2000). n291 See Treas. Reg. 1.6694-3(d) example 4 (2000). n292 See id. n293 See Treas. Reg. 1.6694-3(d) example 3 (2000). n294 See id. Interestingly, Treasury Regulation 1.6662-3(a) (2000) appears to also relieve the taxpayer of the penalty for disregarding rules and regulations for merely RPOS. n295 See supra notes 209-49 and accompanying text. n296 See supra note 254 and accompanying text. n297 See supra note 3 and accompanying text. n298 See supra notes 27268-71 and accompanying text. n299 See supra notes 272-74 and accompanying text. n300 See Dorocak, Potential Penalties and Ethical Problems in Filing an Amended Return, supra note 26150, at n.103 (citing Stephen Labaton, G.O.P.'s Whitewater Report is Expected to Raise Questions Over Clinton Tax Filings, N.Y. TIMES, June 17, 1996, at A13; Carl J. Panek, Clintons Pay Income Tax Penalty Over Whitewater Deductions, CHI. TRIB., May 26, 1996, at C12). The Clintons could possibly blame their tax return preparer for errors in their tax returns.

n301 See Treas. Reg. 1.6694-3(f) (2000). n302 The Clintons' tax return preparer is a CPA at Hariton, Mancuso & Jones in Rockville, Maryland. See Sheppard, supra note 2, at 472; Greater Wash. Society of CPAs, Wash. D.C., GWSCPA Scholarship Fund, at http://www.gwscpa.org/2Pscholarship.htm (Aug. 19, 2001). n303 For a general discussion of the ethical standards for preparers see Dorocak, Potential Penalties and Ethical Problems of a Filing Position, supra note 26150, at 246 n.187 and accompanying text. n304 I.R.C. 6673 (2001). Section 6673 states as follows: (a) Tax Court proceedings (1) Procedures instituted primarily for delay, etc. Whenever it appears to the Tax Court that (A) proceedings before it have been instituted or maintained by the taxpayer primarily for delay, (B) the taxpayer's position in such proceeding is frivolous or groundless, or (C) the taxpayer unreasonably failed to pursue available administrative remedies, the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $ 25,000. For a discussion of penalties as a toll charge rather than a standard of conduct, see generally Panel Discussion, American Bar Association Mid-Year Meeting, Section of Taxation, Standards of Tax Practice Committee, New Orleans, Louisiana (Jan. 1996) (Available from ADC Services, 69013 River Bend Drive, Covington, LA 70433, (504) 892-1157). n305 See Treas. Reg. 1.6694-(c)(2) (2000). n306 See AM. INST. OF CERTIFIED PUB. ACCOUNTANTS, STATEMENTS ON RESPONSIBILITIES IN TAX PRACTICE INTERPRETATION NO. 1-1 (1991), available in FLOYD W. WINDALL, ETHICS AND THE ACCOUNTANT 219 (Prentice Hall 1991); AM. INST. OF CERTIFIED PUB. ACCOUNTANTS, STATEMENTS ON RESPONSIBILITIES IN TAX PRACTICE NO. 1 (1988), available at http://www.aicpa.org (last updated Oct. 23, 2001); AM. INST. OF CERTIFIED PUB. ACCOUNTANTS, STATEMENTS ON STANDARDS FOR TAX SERVICES (2000), available at http://www.aicpa.org/members/div/tax/exsumsts2.htm(last visited Oct. 30, 2001); Id. at 12-14, available at http://www.aicpa.org/members/div/tax/exsumsts2.htm. The new Statements on Standards became effective, and therefore enforceable rather than merely advisory as the old Statements on Responsibilities were, on October 31, 2000. See also J. Edward Swails, New Standards for Tax Practice, J. ACCT., Nov. 2000, at 79. n307 See ABA Comm. On Ethics and Prof'l Responsibility, Formal Op. 85-352 (1985). n308 See id.

n309 See id. n310 Defined as a one-in-three chance of prevailing. See Treas. Reg. 1.66942(b)(1) (2000). n311 See 31 C.F.R. 10.34(a)(1) (2000). n312 See Statements on Standards for Tax Services No. 1, Interpretation No. 1-1, and General Interpretation 5, which state somewhat curiously, "The realistic possibility standard is stricter than the reasonable basis standard that is in the IRC." n313 See id. n314 See Treas. Reg. 1.6694-2(b)(3) example 7 (2000). n315 See supra notes 4-118 and accompanying text. n316 See supra notes 119-203 and accompanying text. n317 See supra notes 204-06 and accompanying text. n318 See supra notes 207-43 and accompanying text. n319 See supra notes 244-49 and accompanying text. n320 See supra notes 250-67, 281-97 and accompanying text. n321 See supra notes 268-81 and accompanying text. n322 See supra notes 91-104 and accompanying text. n323 See supra note 2 and accompanying text.

Search Terms [((NAME(dorocak)))] (1) View search details Source [West Virginia Law Review]

Show Full with Indexing Sort Newest to Oldest Date/Time October 16 2012 22:36:10 1 of 1 Back to Top

About LexisNexis | Terms & Conditions | My ID Copyright 2012 LexisNexis , a division of Reed Elsevier Inc. All rights reserved.