Attorney Grievance Commission v. O'Toole

BATTAGLIA, J. The Attorney Grievance Commission of Maryland (“Petitioner” or “Bar Counsel”), acting through Bar Counsel and pursuant to Maryland Rule l6-75l(a), 1 filed a petition for ⁵⁹⁸ disciplinary or remedial action against respondent, Thomas O’Toole, Esquire, on April 4, 2003. The Petition alleged that O’Toole, who was admitted to the Bar of this Court on December 19,1989, violated several Maryland Rules of Professional Conduct (“MRPC”), specifically MRPC 1.15 (Safekeeping Property) 2 and MRPC 8.4 (Misconduct), 3 by failing to file various state and federal tax returns from 1998 to 2001 and by failing to pay various federal and state taxes for the same period. In accordance with Maryland Rules 16-752(a) and 16-757(c), 4 we referred the petition to Judge Thomas Waxter, Jr., ⁵⁹⁹ of the Circuit Court for Baltimore City for an evidentiary hearing and to make findings of fact and conclusions of law. On August 18, 2003, Judge Waxter held that hearing and on August 26, 2003, issued an opinion in which he found, by clear and convincing evidence, that O’Toole violated MRPC 8.4(d) by failing to file federal and state individual income tax returns for 1998, 1999, and 2000 and by failing to file Maryland withholding tax forms for 1998, 1999, and 2000.

Bar Counsel filed several exceptions to Judge Waxter’s findings and conclusions. O’Toole did not take any exceptions. We overrule all but one of Bar Counsel’s exceptions and conclude that the appropriate sanction in this case is a thirty-day suspension. I. The Hearing Judge’s Opinion Judge Waxter’s opinion of August 26, 2003 summarized the case history and presented his findings of fact and conclusions of law: CASE HISTORY A stipulation of the parties was introduced as joint exhibit number one wherein it was agreed that the Respondent, Thomas O’Toole, was incorporated as Thomas O’Toole P.C., and as such was required to file quarterly withholding tax forms and annual withholding tax consolidation forms, numbers 506 and 508, with the Comptroller of the State of Maryland, indicating the amount of withholding tax that was to be withheld from any wages.

Respondent acknowledged that he failed to file forms 506 for eight quarters (quarters ⁶⁰⁰ ending September 1998, December 1998, March 1999, June 1999, September 1999, December 1999, March 2000 and June 2000), as well as the accompanying forms 508 which consolidated the quarterly forms on an annual basis. It is also admitted that due to the Respondent’s failure to file the required returns, the Comptroller of the State of Maryland, on or about February 7, 2001, filed a notice of lien for unpaid withholding taxes. Additionally, on or about October 19, 2001, the Comptroller issued writs of garnishment against the Respondent’s bank accounts. On or about December 4, 2001 it is acknowledged that the Respondent paid the Comptroller the sum of $7,354.98 which consisted of $4,840 in unpaid withholding taxes, as well as interest and penalties.

It is further admitted that the Respondent filed his 1998 withholding tax forms on or about January 16, 2002, his 1999 withholding tax forms on or about September 10, 2002, and his 2000 Maryland withholding tax forms on or about September 10, 2002. The Respondent admits that he failed to file Maryland state income tax returns and federal income tax returns for the years 1998, 1999 and 2000. It is admitted that all returns were filed in satisfaction by September 2002, and all tax assessments, penalties and interests were paid as of December 2001. Respondent has been in full compliance since 2002.

Although there is no specific claim that the Respondent failed to pay his taxes, Petitioner asserts that Respondent failed to file his withholding tax forms, and state and federal income tax forms for three years 1998,1999 and 2000. FINDINGS Following testimony, the offering of numerous exhibits and tax returns, and argument by counsel, this Court makes the following findings of fact: 1. The Respondent is now in joint practice with Neal Baroody, at 201 North Charles Street in Baltimore, Maryland. Prior to May, 2003, over an extended period of time, Respondent practiced at 1 East Lexington Street with Mr. Baroody and other individuals. ⁶⁰¹ 2.

The Respondent is married, with three children, and is a 1986 graduate of Catholic University Law School. After working for a New York law firm and passing the New York state bar, the Respondent came to Baltimore to work with the firm of Venable, Baetjer & Howard, where he worked for approximately three years. He then went out on his own to practice with several individuals from approximately 1994 to date. The form of organization was a partnership with each of the individual attorneys following a corporate form.

His corporation was known as Thomas O’Toole, P.C. 3. The Respondent was the only employee of his professional corporation, and since his professional corporation was a Sub-chapter S corporation, the income charged to his corporation effectively was his personal income on which he was required to pay state and federal income taxes. For much of the time since 1995 to the present, an accountant has assisted Respondent in filing necessary returns. 4. The Respondent claims that he understood his obligation to file withholding tax returns, although he is not a tax lawyer and is not intimately familiar with forms 506 (payroll withholding form) and 508 (year end reconciliation form).

He testified that he was familiar with his obligation to pay income taxes, and stated that he was actually paying under his social security number an estimated income tax for the years 1998, 1999 and 2000. His state and federal income tax returns, and his withholding tax returns were not filed for these three years, 1998-2000. When his state income taxes were filed early in the year of 2002, it was clear that in each of the three years he had paid more in estimated tax than was due on each return. It appears that at the time he was failing to file his withholding tax returns and federal and state income tax returns, he was making substantial estimated tax payments to the state and federal tax authorities. ⁶⁰² 5.

Because he failed to file his withholding tax returns, the State Comptroller’s Office called him, demanded filings and payment, and ultimately sent him a notice of assessment for the estimated payment of $6,898.03, including $913.03 in interest and a penalty of $1,145.00. After receiving no response in the filing of the forms or payment, the Comptroller filed a lien. Thereafter, the Respondent made full payment of $7,354.98 in December of 2001, and the liens and garnishments were eliminated. Early in 2002, the Respondent through his accountant, filed his delinquent federal and state tax returns as well as the required quarterly returns (form 506) for the years 1998-2000. 6.

The Respondent is an active member of the District of Columbia Bar and the Maryland Bar. He is inactive in the New York Bar because he has not paid his dues since leaving New York. He testified that he has had no other complaints or charges regarding his professional conduct, and is active in pro bono activities. 7. The Petitioner agrees that this case is a failure to file case, including failure to file withholding tax forms to the State of Maryland, failure to file state income tax to the State of Maryland, and failure to file income tax to the Federal Government for the years 1998-2000. 8.

It is admitted that the Respondent has made payments since the year 2001 and is current on his federal and state tax obligations. It is acknowledged that he cooperated with the representative of the Attorney Grievance Commission, that he clearly made mistakes and has acknowledged his failures to file the appropriate documents and his tax returns. He freely acknowledges his error. 9. The Respondent has submitted to this Court several letters from former partners and professional associates, and from clients which confirm his high moral and professional character and his high professional and personal integrity. ⁶⁰³ CONCLUSIONS OF LAW After reviewing the evidence, hearing arguments, and reviewing the applicable law, this Court makes the following findings: 1.

This Court finds by clear and convincing evidence that the failure to file and pay 5 federal and state income tax returns for the calendar years 1998,1999 and 2000, until he filed such returns in 2002, constitutes a violation of Rule 8.4(d) of the Maryland Rules of Professional Conduct. See Attorney Grievance Commission v. Gavin, 350 Md. 176 [, 711 A.2d 193 ] (1998); and Attorney Grievance Commission v. Waters, 2001 Md. LEXIS 864 . 2. This Court finds by clear and convincing evidence that the failure to file Maryland withholding tax forms for Thomas O’Toole P.C. for years 1998, 1999 and 2000, constitutes a violation of Rule 8.4(d) of the Maryland Rules of Professional Conduct. See Attorney Grievance Commission v. Thompson, Misc.

Docket AG, No. 9, September Term, 2002[, 376 Md. 500 , 830 A.2d 474 ] (filed August 13, 2003); Attorney Grievance v. Clark, 363 Md. 169 [, 767 A.2d 865 ] (2001); and Attorney Grievance v. Post, 350 Md. 85 [, 710 A.2d 935 ] (1998). 3. This Court makes these findings by clear and convincing evidence and finds that the Respondent, an experienced and competent attorney, was aware of the obligation to make such filings and failed to do so despite warnings from the Comptroller’s Office, from at least May of 1999 through its assessment procedure, lien procedure and final garnishment procedure that resulted in the garnishment of his professional accounts in December 2001. ⁶⁰⁴ While this Court finds no clear and convincing evidence of fraud, the Court has no hesitancy under the facts and the law in finding separate violations of Rule 8.4(d) of the Maryland Rules of Professional Conduct.

II

Standard of Review This Court has original and complete jurisdiction over proceedings involving attorney discipline. Attorney Grievance Comm’n v. Seiden, 373 Md. 409, 414 , 818 A.2d 1108, 1111 (2003). Clear and convincing evidence must support the hearing judge’s findings. Attorney Grievance Comm’n v. Monfried, 368 Md. 373, 388 , 794 A.2d 92, 100 (2002).

Bearing this in mind, we review the record independently but generally accept the hearing judge’s findings of fact unless they are clearly erroneous. Attorney Grievance Comm’n v. Garfield, 369 Md. 85, 97 , 797 A.2d 757, 764 (2002). Any conclusions of law made by the hearing judge, such as whether provisions of the MRPC were violated, are subject to our de novo review. Attorney Grievance Comm’n v. McLaughlin, 372 Md. 467, 493 , 813 A.2d 1145, 1160 (2002).

III

Discussion Bar Counsel filed exceptions challenging a number of the hearing judge’s findings and conclusions. We shall address each exception in turn. First, Bar Counsel disagrees with the hearing judge’s declaration that this case is merely a “failure to file” case. In particular, Bar Counsel disputes the hearing judge’s statement that “there is no specific claim that the Respondent failed to pay his taxes,” because, according to Bar Counsel, the Petition “specifically asserted” a failure to file tax returns and pay Maryland withholding taxes.

Bar Counsel argues additionally, but along the same lines, that the hearing judge’s description of the case as a “failure to file case” cannot be reconciled with the judge’s finding of fact that O’Toole did not pay Maryland withholding taxes until after the State Comptroller garnished his bank accounts. In Bar Counsel’s view, the hearing judge should have concluded that O’Toole violated MRPC 8.4(d) by not only failing to file the ⁶⁰⁵ necessary tax forms but also by failing to pay State withholding taxes when they were assessed. 6 We disagree. O’Toole formed his professional corporation, Thomas O’Toole, P.C., as a so-called “Subchapter S corporation” or “S corporation” under the federal tax laws. See 26 U.S.C.A. §§ 1361-1379 (2003).

A “Subchapter S” corporation allows a company of seventy-five or fewer shareholders to enjoy the benefits of incorporation but avoid the taxation of both the corporate entity and its shareholders. Id., § 1361(b)(1)(A) (defining an “S corporation” and setting forth the eligibility criteria); see Byrne v. Commissioner, 361 F.2d 939, 942 (7th Cir.1966) (recognizing the purpose of the S corporation, “ ‘to permit a qualified corporation and its shareholders to avoid the double tax normally paid when a corporation distributes its earnings and profits as dividends’ ”). Thus, with few exceptions, the corporation does not pay tax at the corporate level, but its earnings “pass through” to the shareholders who must report profits or losses on their federal and state individual income tax returns. Id., §§ 1363(b) (providing that, with several exceptions, “[t]he taxable income of an S corporation shall be computed in the same manner as in the case of an individual”), § 1366(a)(1) (providing that the shareholders of an S corporation pay taxes according to the corporation’s income or losses).

Judge Waxter’s findings of fact, which were not clearly erroneous, demonstrate that O’Toole was the sole employee of Thomas O’Toole, P.C. since its formation in 1993. As an employer of O’Toole, Thomas O’Toole, P.C., the corporation, was required to comply with Maryland Code, § 10-901 et. seq. of the Tax-General Article (1957, 1997 Repl.Vol., 2002 Supp.), which set forth an employer’s duties regarding withholding employee taxes. One duty, under Section 10-906(a), 7 required ⁶⁰⁶ an employer to withhold a specified amount of employee wages periodically and then pay that money to the State Comptroller each period. Section 10-817 of the Tax-General Article (1957, 1997 Repl.Vol.) 8 required an employer to report all such withholdings and, under Section 10-822, 9 the reports must have been completed and filed monthly, quarterly, or annually, depending on the amount of tax reasonably expected to be withheld.

The parties in this case stipulated that ⁶⁰⁷ O’Toole, on behalf of Thomas O’Toole, P.C., was required to make quarterly reports and, in addition, file a separate report annually as a year-end reconciliation. Quarterly reports are made on a Form MW 506 (Employer’s Return of Income Tax Withheld), and a Form MW 508 (Annual Employer Withholding Reconciliation Report) is used to report the year-end withholding tax reconciliation. See COMAR 03.04.01.01(D)(1), 10 03.04.01.01(E)(2)(a). 11 For a number of quarters prior to the time period at issue in this case, O’Toole had withheld amounts from his own salary, filed the withholding returns, and made the corresponding tax payments to the State. During the eight quarters in question in this case, from September of 1998 through June of 2000, O’Toole did not file the forms MW 506 quarterly or the MW 508 annually, although he had a continuing obligation to do so.

During this same time period, however, O’Toole had made substantial estimated state and federal tax payments under his social security number. Because O’Toole made his estimated payments to his social security number rather than along with the required withholding return forms, the State Comptroller applied them to him personally instead of to Thomas O’Toole, P.C. The money was not credited to the corporation’s tax obligations. Therefore, based on O’Toole’s corporation’s previous withholding payments from before September 1998, the State Comptroller estimated O’Toole’s tax liability for the eight quarters at issue, added interest and penalties, and on November 21, 2000, sent him a notice of assessment for $6,795.98. The State Comptroller thereafter filed a lien for the assessment amount and sought garnishment of O’Toole’s bank accounts.

Judge Wax ⁶⁰⁸ ter found that O’Toole made a payment of $7,354.98 to the State Comptroller on December 5, 2001. Bar Counsel contends that the one-year lapse between the assessment of the withholding tax and O’Toole’s December 5, 2001 payment constituted a failure to pay withholding taxes and a violation of MRPC 8.4(d). The argument misses the mark. O’Toole’s and his corporation’s State tax payment obligations during the eight quarters at issue were satisfied by his previously made estimated tax payments.

Judge Waxter found, in fact, that these payments exceeded his corporate and personal state tax liability at any given time during the period in question. As a result of his estimated payments, whenever tax payments to the State came due during the years of 1998 to 2000, the State Comptroller had in its possession enough of O’Toole’s money to account for those obligations. Hence, Judge Waxter’s conclusion that O’Toole did not violate MRPC 8.4(d) by failing to pay taxes is sufficiently supported by the record. We shall overrule Bar Counsel’s exception. 12 Bar Counsel also excepts to the hearing judge’s finding that “[i]t is admitted that the Respondent has made payments since the year 2001.” The parties interpret this statement by the hearing judge differently.

Bar Counsel seemingly reads this statement to mean that O’Toole timely met all of his payment and filing obligations in 2001, which Bar Counsel ⁶⁰⁹ believes is contrary to the evidence in the record. On the other hand, O’Toole considers this statement to mean simply that, after 2001, he has made tax payments. The finding, in O’Toole’s view, is not clearly erroneous because Bar Counsel admitted in the record that O’Toole made payments in 2001 and 2002. A plain reading of the hearing judge’s statement leads us to agree with O’Toole that the hearing judge merely found that O’Toole had made tax payments after 2001.

Clear and convincing evidence in the record supports this finding. The testimony of the State Comptroller’s representative at the hearing indicates that O’Toole made full payment of the assessed withholding tax amount in December of 2001 and that O’Toole made another payment on April 30, 2002. Additionally, the parties stipulated that, “[o]n or about December 4, 2001, Respondent paid the Comptroller the sum of $7,354.98.... ” Bar Counsel’s exception is, therefore, overruled. Bar Counsel’s final exception relates to the hearing judge’s failure to find a violation of MRPC 8.4(b), which provides that “it is professional misconduct for a lawyer to commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects.” Bar Counsel urges that O’Toole committed this variety of misconduct by wilfully failing to file an income tax withholding return in violation of Maryland Code, Section 13-1007(a) of the Tax-General Article (1988, 1997 RepLVoL, 2002 Supp.) 13 and by wilfully failing to file an income tax return in violation of Maryland Code, Section 13-1001(d) of the Tax-General Article (1988,1997 Repl.Vol., 2002 Supp.). 14 ⁶¹⁰ To establish a violation of MRPC 8.4(b), Bar Counsel must prove by clear and convincing evidence that O’Toole not only committed a criminal act, but also that the criminal act “reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects.” See Attorney Grievance Comm’n v. Post, 350 Md. 85, 92 , 710 A.2d 935, 938 (1998).

In the case before us, the hearing judge’s findings make it clear that O’Toole committed at least two types of criminal acts: the willful failure to file Maryland withholding tax forms and the willful failure to file income tax returns. Thus, the question becomes whether either or both of these types of criminal acts fulfills the second element of an MRPC 8.4(b) violation by reflecting adversely on O’Toole’s honesty, trustworthiness, or fitness to practice law. First, we consider whether O’Toole’s failure to file withholding tax forms violated MRPC 8.4(b). Our opinions in Attorney Grievance Comm’n v. Post, 350 Md. 85, 92 , 710 A.2d 935, 938 (1998) and Attorney Grievance Comm’n v. Clark, 363 Md. 169 , 767 A.2d 865 (2001), which discuss attorneys’ failures to file and pay withholding tax returns, guide our analysis here.

In Post , we held that an attorney’s failure to file and pay withholding tax did not constitute a violation of MRPC 8.4(b) under the circumstances in that case. 350 Md. at 99-100, 710 A.2d at 942 . Post, the attorney facing disciplinary charges in that case, had maintained a business that operated with several employees whose income he had withheld for tax purposes. Id. at 91 , 710 A.2d at 937-38 . Although there was a specific finding that Post did not intend to defraud the government, it was determined that he willfully neglected his obligation to file and pay withholding tax returns on behalf of his business and, instead, applied the money withheld from his employees to pay other business expenses.

Id. at 93-94 , 710 A.2d at 939 . To assess whether this conduct violated MRPC ⁶¹¹ 8.4(b) as the hearing judge had found, we focused on the second element of the inquiry: whether failure to file and pay withholding tax returns “reflects adversely on his fitness as a lawyer.” Id. at 99 , 710 A.2d at 942 . Chief Judge Bell, writing for the majority of the Court, stated: We do not believe that, under the circumstances of this case, that the respondent’s conduct “reflects adversely on his fitness as a lawyer.” The only basis for the [hearing judge’s] conclusion that it does reflect adversely on his fitness as a lawyer is that failure to practice what one preaches undermines one’s credibility as a provider of legal counsel. But that is simply another way of saying that the administration of justice may be prejudiced.

The [hearing judge] was specific in rejecting any suggestion that, by [Post’s] actions, the respondent’s honesty and trustworthiness was compromised, the conclusion that one could most logically be expected to draw. Moreover, the [hearing judge] also diagnosed the problem as one involving the respondent’s office management skills rather than “his performance or abilities as an attorney.” Id. (footnote omitted). This Court further observed that Post had never before been the subject of attorney disciplinary proceedings and that the evidence suggested that he was “a man of good character, a truthful person, and a good attorney who has given his clients good advice and has served them well.” Id.

In Clark , we agreed with the hearing judge’s conclusion that Clark had violated MRPC 8.4(b). Id. at 179 , 767 A.2d at 871 . Clark had employed a secretary whose income he had withheld for tax purposes. On repeated occasions from September of 1992 until January of 1999, Clark neglected to file the appropriate withholding tax forms and frequently did not make the required quarterly payments of his secretary’s withheld wages.

Id. at 175-77 , 767 A.2d at