Dirty (Swimming) Pool

An Illinois Hearing Board recommends disbarment based on findings that the Respondent has assisted in a client’s misconduct

The Administrator filed a three-count Complaint against Respondent alleging he participated in a scheme that had the dual purpose of concealing financial information from a client’s estranged wife and helping the client and his business evade taxes.

Findings

Respondent engaged in a series of acts intended to help a client conceal payments of his personal expenses with corporate funds and claim improper tax deductions for the client’s business by mischaracterizing payments of the client’s personal expenses as business expenses in corporate books and documents and on state and federal tax returns. Respondent’s conduct included providing the client with a credit card linked to Respondent’s credit card account to be used for personal expenses; facilitating the payment of $421,306.98 for the client’s personal credit card expenditures and legal fees through Respondent’s IOLTA account with funds deposited by the client’s business; knowingly mischaracterizing those payments as business expenses in the corporate books and in state and federal tax returns; falsely claiming tax deductions for the client’s business based on the mischaracterized expenses; and underreporting the client’s income on his personal tax returns. The Administrator proved the charged misconduct by clear and convincing evidence.

The attorney was admitted in 1978

The allegations before us pertain to Respondent’s conduct involving his friend and client, Luis Downes, between 2011 and 2018. Respondent has performed legal and accounting work for Luis, personally, and Luis’s business, Downes Swimming Pool Company, Inc. (DSPC), from approximately 2000 through the time of the hearing. (Tr. 372-73). That work includes maintaining the books and ledgers for DSPC, preparing and filing state and federal tax returns for Luis and DSPC, and representing Luis and his family members in various matters. (Tr. 160, 162).

During the time relevant to this matter, DSPC was a C corporation. As such, it was a separate legal entity from Luis. DSPC’s income, expenses, and deductions remained with the corporation and did not flow through to Luis. Luis received a salary from DSPC and filed personal Form 1040 tax returns. (Tr. 299).

Credit card use

The evidence established that Respondent knew that the $219,208.48 in credit card charges he characterized as “service fees,” “professional fees,” or “travel and entertainment” and deducted as DSPC business expenses on state and federal tax returns were in fact Luis’s personal expenses. Luis freely admitted that he told Respondent he wanted to use Respondent’s American Express account for his own personal expenses because he did not want Christine to know what he was doing and where he was going…

Respondent knew that at least $161,143.50 in legal fees that he characterized as DSPC business expenses were not for a valid DPSC business purpose. Respondent knew these fees were for Luis’s dissolution matter and other personal matters because Respondent made the payments to Luis’s dissolution lawyers and to himself from his client trust account. Respondent had no legal basis to believe that the entirety of Luis’s divorce attorneys’ fees constituted business expenses, as the United States Supreme Court clearly held, in United States v. Gilmore, 372 U.S. 39 (1963), that a taxpayer’s legal expenses in contesting divorce proceedings were not deductible business expenses even if the taxpayer was seeking to protect business assets against a spouse’s claims.

Dishonesty

In addition to falsely attesting to the accuracy of DSPC’s tax returns for six consecutive years, Respondent actively participated in and facilitated the scheme that resulted in DSPC and Luis evading taxes. He gave Luis an American Express card, controlled the payments of Luis’s personal expenses through his IOLTA account, ensured that the DSPC payments were characterized as professional fees in its corporate books and records, and prepared and filed fraudulent tax returns. Respondent’s conduct was intentional and was calculated to deceive tax authorities. 

Sanction

Respondent committed egregious misconduct. He facilitated a years-long scheme, involving more than $400,000, to claim false tax deductions for DSPC and understate Luis’s personal income. He had actual knowledge that the tax returns he filed were not true or accurate, yet he certified them. Although it was Luis and DSPC who directly benefited from this wrongdoing, Respondent benefited by maintaining Luis and DSPC as clients who paid him over $500,000 in fees during the time period at issue. The deception carried over into Luis’s dissolution matter when Respondent provided information that he knew misstated Luis’s income.

The board found that the mitigation did not justify a lesser sanction. (MIke Frisch)