NJSBA Family Law Section

Discovery has shown irrefutable evidence (i.e., cash deposits, checks written to a business deposited into a personal account) that there is serious potential Sheridan issues in a matter.

I advised my adversary of this, and, in spite of the documents, he says "my client has done nothing wrong and won't agree to arbitration rather than a trial if the case continues."

My client may also have some exposure, although at far, far lower numbers (house cleaner).

If my adversary insists on moving to trial where all of this comes out, both parties may have a problem (although his more than mine).  My client (and me) are concerned about the potential consequences.

Has anyone dealt with this?  I'm inclined to write adversary (not generally a bad fellow, I think his client is difficult) and suggest that he may have malpractice liability if he turns down our suggestion that we move this to arbitration if we can't resolve it.  Any other suggestions?  Should there be any ethical worry about "threatening criminal sanctions in a civil matter" if all I'm suggesting is that we move it to arbitration (I'm obviously not saying "settle or else there could be criminal trouble" to him)

And... related... has anyone seen the AG or IRS actually act when a referral is made?  There was a judge in Mercer 10 years ago who referred things very easily (to State AG, fed AG, IRS, and NJ Division of Taxation).  If he even saw documents as attachments to a motion, he would refer it (I've heard many judges say that unless there's a hearing or trial, they're not going make findings that require referral...and had several point out in chambers that there might be an issue if the court was forced into a position where it had to find such facts).  Of all the referrals (I saw at least 4-5), in exactly zero cases were the clients even contacted (although they continue to sweat).  Has anyone seen a Sheridan referral actually result in action against someone?

Thanks.

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David Perry Davis, Esq.
112 West Franklin Avenue
Pennington, NJ 08534
Voice: 609-737-2222
Fax: 609-737-3222
http://www.FamilyLawNJ.pro
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If your case is pending in Middlesex County, you may want to send your adversary a copy of this unreported App Div case that was recently decided [below].  Highlight for him the section in the decision referencing the trial judge's referral of the case to the AG, Division of Tax, IRS and county prosecutor.  

I've been in a similar position and would be interested to know of any instances where the litigants were actually contacted, audited and/or charged. 

A-5768-12T2
ESTATE OF MILAGROS BELTRA VS. ENRIQUE BELTRA
(FM-12-1323-10, MIDDLESEX COUNTY AND STATEWIDE

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Lisa M. Radell, Esq.
207 South Main Street
Cape May Court House, NJ 08210
Phone (609) 465-9910
Fax (609) 465-9920
E-Mail [email protected]
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Blinders Won't Hide The Elephant In The Room

July 21, 2008

©2008 New Jersey Law Journal  

New Jersey Family Law judges and lawyers learned much from Sheridan v. Sheridan, 247 N.J. Super. 552 (Ch. Div. 1990). In Sheridan, the court ruled that where evidence establishes intentional tax evasion, a judge must report such wrongdoing to the appropriate authorities. The teaching of Sheridan remains clear and beyond dispute. Nevertheless, the ensuing 18 years of New Jersey matrimonial practice have led to various evasions, half-truths and massive denial, mostly leading to a "Don't Ask, Don't Tell" policy. This article suggests that putting on blinders will not hide the elephant in the room.

Actually, prudent matrimonial practitioners would be wise to construe Sheridan in the post-Enron climate of placing greater burdens on lawyers to report "crimes." Moreover, the present legal-ethical-moral environment is not likely to dissipate soon, especially after the current finger-pointing taking place in the subprime maelstrom roiling the financial markets.

The following 10 myths illustrate received illusions (delusions?) regarding Sheridan cases.

Myth #1: The failures to file tax returns or to pay taxes are only civil offenses, not crimes.

Fact: "Any person, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution." 26 U.S.C.§7203.

Myth #2: Legal ethics have no bearing on Sheridan issues.

Fact: Under the New Jersey Rules of Professional Conduct: (1) A lawyer shall not counsel or assist a client in conduct that the lawyer knows is illegal, criminal or fraudulent; (2) A lawyer shall reveal such information to the proper authorities, as soon as, and to the extent the lawyer reasonably believes necessary, to prevent the client from committing a criminal, illegal or fraudulent act that the lawyer reasonably believes is likely to result in (a) death or substantial bodily harm, (b) substantial injury to the financial interest or property of another, or (c) a fraud perpetrated upon a tribunal; and (3) A lawyer shall not knowingly make a false statement of material fact or law to a third person or fail to disclose a material fact.

Myth #3: Prosecuting authorities, such as the Department of Justice and the Internal Revenue Service, have no interest in pursuing mere unreported/under-reported income cases.

Fact: In Boulware v. United States, 380 U.S. 343 (2008)(March 3, 2008),  the controlling shareholder of a closely held corporation was convicted for criminal tax evasion and filing false income tax returns. The defendant pleaded guilty to tax evasion, resulting in a $228,000 deficiency. Although the District Court imposed a below-guidelines sentence of 250 hours of community service, three years of probation, a $250,000 fine and in-house alcohol abuse treatment, the Third Circuit deemed this inadequate. Because the sentence was unreasonable, it was rejected and remanded for resentencing.

Myth #4: Sheridan only applies to divorce cases.

Fact: In commercial litigation arising from breach of an employment contract, the trial court interrupted cross-examination to warn continued testimony could result in a criminal referral. The Appellate Division cited Sheridan with favor and emphasized that judges have a duty to report intentional misrepresentation of income. All Modes Transport Inc. v. Hecksteden, 389 N.J. Super. 462 (App. Div. 2006).

Myth #5: Once a  Property Settlement Agreement is signed and all assets have been distributed, there is no after-the-fact Sheridan exposure.

Fact: "There is no contention that any term of the PSA violated any law, any expression of public policy endemic to family disputes generally, failed to protect the best interests of the children, or fostered non-disclosure of the family's affairs to appropriate taxing authorities. Under these circumstances, we discern no standard of attorney care that was breached." Lerner v. Laufer, 359 N.J. Super. 201 (App. Div. 2003).

Myth #6: The attorney-client privilege provides lawyers with complete Sheridan protection.

Fact: From State v. Ray, 372 N.J. 496, 500 (2004): "Public policy considerations have led the courts and legislature to include limited exceptions to the attorney-client privilege." From Fellerman v. Bradley, 99 N.J. 493, 502, 493 A.2d 1239 (1985): "The crime or fraud exception expressly provides such privilege shall not extend . . . to a communication in the course of legal service sought or obtained in aid of the commission of a crime or a fraud. N.J.S.A. 2A:84-20(2)(a); N.J.R.E. 504(2)(a). This exception is a statutory recognition of a situation in which the purpose of the privilege would not be served by its enforcement. A lawyer cannot be properly consulted professionally for advice to aid in the perpetration of a fraud on a court. The claim of privilege is that of the client and a fraudulent object or purpose puts him beyond the scope of this protection."

Myth #7: Binding arbitration is a safe way to deal with Sheridan problems.   

Fact: "An Arbitrator should withdraw from the process if the Arbitration is being used to further criminal conduct."    JAMS Arbitration Rules. 

Myth #8: New Jersey mediation is a safe haven for Sheridan offenses.

Fact: "There is no privilege for a mediation communication that is.. a threat or statement of a plan to inflict bodily injury or commit a crime; or intentionally used to plan a crime, and there is no privilege if the mediation communication is sought or offered in a court proceeding involving a crime." N.J.S.A. 23:C-6, New Jersey Uniform Mediation Act.

Myth #9: After the Statute of Limitations has expired, there is no Sheridan problem.

Fact: When a taxpayer files a fraudulent tax return  but later files an amended return, prosecution may nevertheless take place at any time, regardless of whether more than 3 years have expired since the filing of the amended return, based on Section 6501(c)(1) of the Internal Revenue Code. Badaracco v. Commissioner, 464 U.S. 386 (1984).The statute of limitations for the IRS to assess and collect any outstanding balances does not start until a return has been filed. In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed.

Myth #10: Even when there are Sheridan issues, an innocent spouse will be exonerated.

Fact: The wife was not eligible for the benefits of Innocent Spouse treatment under Internal Revenue Code Section 6015. Thus, the tax penalties, interest and liabilities in question were not solely attributable to the husband. The wife was deemed to have had actual knowledge of the understatements of income. This was because she was college-educated, she had access to the parties' joint bank accounts, she balanced the parties checkbook, she admitted to her status as a member of the parties' Limited Liability Partnership, and she failed to satisfy her duty to make diligent inquiry. Golden et us. v. Commissioner, TC Memo 2007-299 [2007].

Based on the foregoing, those who ignore Sheridan do so at their peril. Furthermore, additional Sheridan urban legends should now be laid to rest. These include the fanciful notion that Sheridan can only be triggered when live testimony is adduced in open court. And what of other sworn proofs, such as answers to interrogatories, deposition transcripts and certifications or affidavits? Nothing in Sheridan limits its applicability only to courtroom testimony. Nothing in Sheridan excludes other evidence provided under oath. To believe otherwise is to engage in contorted legal sophistry, or denial, or both. Another anecdotal fable? Sheridan does not apply to fraudulent tax returns, if those returns are not actually entered into evidence. But this is one more transparent ploy, precisely because the falsity of the returns can be shown in other indirect ways.

In the final analysis, why such hyper-sensitivity to Sheridan cases? The answer does not emanate from a holier-than-thou stance. Consider these 4 premises:

•Sheridan offenders are either criminals or stand to be prosecuted as such;

• Some charged with crime wind up getting indicted, prosecuted or convicted. When they do, some will say anything to exculpate themselves. This may include perjury; it may include "ratting out" their attorney, or their arbitrator, or their mediator;

• Leaving aside subjective value assessments about Sheridan offenders, each attorney's choice should focus on intelligent decisions and personal risk assessment. Certainly, the reader is free to see it otherwise; and

• When a Sheridan offender gets indicted, a lawyer, mediator or arbitrator might be named as a co-defendant for "aiding and abetting." Is this overly protective of one's ass[ets]? Maybe. The reader may well act differently with her/his own ass[ets].

Someday, the Supreme Court of New Jersey may speak to these issues. Will it conclude that New Jersey mediations and arbitrations are safe harbors for tax and other crimes?

Until then, New Jersey lawyers confronted with Sheridan issues can carefully assess (a) their role as officers of the court, (b) the New Jersey Rules of Professional Conduct, and (c) the risk/reward ratio. Only then should they proceed, based on their own individual comfort levels. 
 


Charles Abut Esq.
Hackensack NJ
(201)342-0404
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