Attorney Grievance Commission v. Hoang

PER CURIAM. The Attorney Grievance Commission, acting through Bar Counsel, filed a petition for disciplinary action against John Thanh Hoang for violation of the Maryland Lawyers Rules of Professional Conduct (MLRPC), alleging that Hoang violated the following provisions of MLRPC 8.4: Rule 8.4. Misconduct. It is professional misconduct for a lawyer to: (b) commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects; ⁶⁰³ (c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation; (d) engage in conduct that is prejudicial to the administration of justice....

The facts of the misconduct are not in dispute. Hoang, an attorney admitted to practice in Maryland on June 25, 1986, 1 was a registered partner in Tax-Smart Technology Services (“Tax-Smart”), a Florida partnership offering tax strategies and tax preparation services from its office in Alexandria, Virginia. A tax strategy that Tax-Smart and Hoang, a then-partner and certified public accountant of Tax-Smart, created and sold to their customers was the sale of websites, 2 which was used by Hoang and Tax-Smart to fabricate an elaborate fraudulent tax deduction scheme. This scheme was carried out by Hoang, via Tax-Smart, in several stages.

First, Respondent would charge customers a fraction of a website’s sales price by credit card or by assignment of a portion of a future federal tax refund, as well as require a down payment of 1/6 or 1/7 of the stated website sales price. The customer paid the balance of the website’s sales price with an interest-bearing promissory note in installments over a nine-year period. At the same time that a customer would enter into Tax-Smart’s website sales agreement, the customer would enter into a licensing agreement with Tax-Smart that licensed the business to use the source code operating the just-purchased website for a nine-year term. In exchange for the license, Tax-Smart would pay the customer an annual licensing fee. 3 The licensing fee equaled ⁶⁰⁴ the interest on a promissory note, given by the customer to Tax-Smart for the purchase of the website, and the principal at the end of the nine-year contractual period. 4 As a result, Tax-Smart’s strategies created illusory financial obligations for their customers: beyond their initial down payment when contracting with Tax-Smart to purchase a website, customers did not pay the actual market value of the websites because Tax-Smart sold the websites at stated prices vastly exceeding the value of a website’s source code, domain name, and the value of the services necessary to operate the website.

Customers earned greater returns when Hoang deducted 1/3 of the stated sale price of the website as a depreciative expense on Schedule C of customers’ 1040 federal income tax returns for each of the first three years of Hoang’s scheme. Hence, a customer was able to claim the entire listed website price as a business loss in the form of depreciation deductions over a three-year period, thereby reducing his or her tax liabilities. Hoang employed this tax deduction scheme in the preparation of at least 527 tax returns for customers between 2003 and 2006. Respondent would create Schedule C returns with fictitious gross receipts, which were offset by losses from the purchase of the websites.

Customers for whom Hoang prepared tax returns had other income from wages, salaries, or other sources and offset this income with business losses from fictional ventures. Furthermore, Respondent was able to reclaim for his customers a full year’s depreciation deduction for the purported year of sale of the website by back-dating several contracts to January 1 of the year before the sale occurred. This strategy was extended further by Hoang’s sale to multiple customers of the same source code applied to the same domain name. Compensation for Hoang’s services ⁶⁰⁵ was taken from a percentage of the refunds generated by his preparation of the fraudulent tax returns.

Respondent promised his customers that he would defend any customer audited by the IRS. In November 2005, the Internal Revenue Service (“IRS”) notified Hoang that it intended to investigate the sale of the tax deduction strategy employed by Tax-Smart, as well as the associated Schedule C deductions. Tax-Smart and Hoang continued to sell the “product,” and many of Tax-Smart customers’ 2006 returns prepared by Hoang show he continued to make deductions using this strategy. None of the federal income tax returns examined by the IRS in which this strategy was used were determined to be correct.

Hoang scheduled (and then canceled) appointments with the IRS concerning the audits of six customers, failed to provide requested documents, and refused to contact his audited customers. The IRS calculated that the tax deduction scheme cost the federal government approximately $11,600 per tax return, or $6,100,000 in 2003 alone. On May 8, 2008, the U.S. Government filed a complaint for permanent injunction and other relief in the U.S. District Court for the Eastern District of Virginia against Hoang and Tax-Smart Technology Services, seeking to enjoin the fraudulent tax deduction scheme under 26 U.S.C. §§ 7402 , 7407, and 7408. On May 12, the parties entered into an agreement in which Hoang, on behalf of himself individually and Tax-Smart, consented to the entry of a Stipulated Judgment of Permanent Injunction.

Hoang agreed not to offer tax services that promote non-compliance with federal tax laws, participate in making false representations that customers may take tax deductions without regard to whether the customer is engaged in a bona fide business activity, or claim a tax deduction for software depreciation without regard to the true value of the software or whether the software is used in a legitimate business venture. Hoang agreed also not to prepare, file, or assist in preparing or filing any federal income tax returns for any person other than himself. In the course of the Government’s investigation, it was discovered further that, as of May ⁶⁰⁶ 12, 2008, Hoang had not filed his personal federal income tax returns for any tax years since 2000, which violated 26 U.S.C. §§ 6700 , 6701, 6694, and 7203. In February 2009, Bar Counsel filed charges against Hoang, charging him under MLRPC 8.4(b) (committing a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness, or fitness as a lawyer); 8.4(c) (engaging in conduct involving dishonesty, fraud, deceit or misrepresentation); and 8.4(d) (engaging in conduct that is prejudicial to the administration of justice).

In accordance with Maryland Rule 16-709, we ordered that the matter be transmitted for hearing and the rendition of findings of fact and conclusions of law to the Honorable David A. Boynton of the Circuit Court for Montgomery County. Pursuant to the Order, Hoang was directed to respond to the charges filed by Bar Counsel within fifteen days of the date of service upon him of the Petition for Disciplinary Action. On June 22, 2009, personal service of a copy of the Petition for Disciplinary Action (the “Petition”), Writ of Summons, and Order was made properly upon Hoang by an investigator for the Attorney Grievance Commission at his last known address of 3985 Pearlberry Court, Woodbridge, VA 22193. Respondent failed to respond to the Petition.

On July 15, 2009, Bar Counsel requested this Court to enter an Order of Default against Hoang and to schedule a hearing on the charges. The request was granted. An Order of Default against Respondent was entered on July 30, 2009 for his failure to respond to the charges within the time permitted by the Order. A notice was sent to Hoang at his last known address, informing him that the Order of Default has been entered and that, pursuant to Md. Rule 2-613, he may move to vacate the Order within thirty days after entry of the Order.

Respondent did not do so. On September 4, 2009, a hearing on the Petition was conducted by Judge Boynton. Evidence admitted at the hearing included the affidavit of Sydney Hart, the IRS agent assigned to audit the tax returns prepared by Hoang and Tax- ⁶⁰⁷ Smart for their customers; the consent of Hoang to the entry of a Stipulated Judgment of Permanent Injunction against him and Tax-Smart that was filed in the U.S. District Court for the Eastern District of Virginia; and Bar Counsel’s proposed findings of fact and conclusions of law. Respondent failed to appear or participate in the hearing.

Judge Boynton issued Findings of Fact and Conclusions of Law on December 14, 2009. Because Respondent failed to file a motion to vacate the default judgment entered against him on July 30, 2009, the hearing judge deemed the averments of Bar Counsel’s Petition as admitted, pursuant to Md. Rules 754(c) and 2-323(e). By a standard of clear and convincing evidence (Md. Rule 16—757(b)), the hearing judge rendered findings of fact consistent with the facts iterated earlier in this opinion. Based on those findings, the hearing judge concluded as follows regarding the alleged MLRPC violations: The facts set forth ... indicate that Mr. Hoang violated Rule 8.4(b), which prohibits an attorney from engaging in criminal conduct that reflects adversely on his fitness to practice law, by devising and carrying out a scheme to defraud the United States Government of funds lawfully due to it by preparing tax returns with fraudulent deductions.[ 5 ] * * * * * * The facts ... show that Mr. Hoang prepared more than 500 tax returns which claimed fictitious gross receipts for fictitious businesses so that his clients could show business ⁶⁰⁸ losses by deducting inflated amounts for purchases of websites.

These business losses were then used to reduce the tax liabilities of individuals who were salaried employees. The Court of Appeals has held that the preparation of a fraudulent tax return in violation of 26 U.S.C. § 7206 (1), which prohibits fraudulent conduct by those filing a return, is a crime of moral turpitude in a case involving the predecessor rule to M[L]RPC 8.4(b). Attorney Grievance Commission v.